Daily Archives: June 25, 2010

The BP Long Case (by Springheel Jack)

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Obviously there are few companies in the US less popular than BP right
now. They may even have overtaken GS as the least well regarded big
company there. Listening to the talk in the US media, and from US
politicians, bankruptcy is on the cards, along with seizure of all
assets and perhaps public lynchings for all senior executives.

Looking beyond the media storm though, BP is now dropping to a
support level that has held for many years:

100625 BP Monthly RAA Broadening Formation

In the bankruptcy talk there also seems to be an assumption that BP is a
single monolithic entity, which it isn't. The US operation owning the
well is BP America Production, which is a fully owned and limited
liability subsidiary of BP Company North America Inc, which is the same
in turn to BP Corporation North America Inc, which is the same to BP
America Inc, which is the same to BP Holdings North America Ltd, which
is the same to the overall parent company BP Plc.

That is a lot of layers of limited liability, and while anti-Brit
sentiment in the US, and therefore the US courts, is running high, the
top two companies in the chain would fall under the jurisdiction of the
British courts, where anti-Brit sentiment is at a low ebb.

Here's the BP corporate structure with the affected BP subsidiaries
in red:

100625 BP Corporate Structure

Looking around for info on the web, the view seems to be that the whole
operation in the US has assets of $50bn, against BP assets of $160bn
worldwide.

Estimates of potential liability are hard while the leak is ongoing, but
the highest consensus view seems to be up to $50bn, for a company
generating over $20bn a year worldwide. That liability may in any case be shared with other companies involved with the well, including Transocean, the rig owner, Halliburton, Mitsui and Anadarko, among others.

Liability on these offshore wells is capped in US law to $75m, not
including class action and other lawsuits I think. US politicians are
looking at changing that retrospectively, but these sorts of targeted
retrospective law changes, while perfectly normal in (say) Russia or
Venezuela, have been traditionally regarded with hostility by both US
and international courts, and with good reason as they are a direct
attack on the rule of law.

However BP has been offering to effectively ignore this cap, which may
in any case be stripped away in the event that BP America Production is
found guilty of gross negligence. If gross negligence is demonstrated
(and that would be in a US court) then BP America Production and its
subsidiaries may well be bankrupted and liquidated, but the question
then becomes whether this would spread further up the line.

That seems unlikely, as unless it could be demonstrated that BP
America Production and its parent companies were effectively being
operated as one company, then the limited liability will stand legally,
and any attempt to strip it away by legislators is much less likely to
be supported in the courts than a retrospective change to the liability
cap would be, as limited liability is a legal cornerstone of US
capitalism  in a way that doesn't really allow for exceptions made at
the whim of politicians.

All-in-all I don't believe BP US as a whole is going to go under, and
if it does then bankruptcy in the US wouldn't seem to threaten more
than 40% at most of BP's global assets in any case. BP's share price has
fallen 50% since the leak started, so bankruptcy in the US looks more
than priced in already.

I don't think that there's any realistic chance that BP worldwide could
be liquidated as a result of this mess, and any attempt to do so by US
legislators would be unlikely to achieve anything more than irritate the
British government, whose people are already doubtful about the UK's
very close alignment with the US in recent years, and not at all
impressed about Obama's habitually anti-Brit attitude in any case.

Support for BP at $27 may not hold, but at the least BP looks an
interesting speculative long there as it is the key major support level
for BP in the last fifteen years.

I thought that these articles were interesting, among others:

http://dealbook.blogs.nytimes.com/2010/06/15/bps-options-to-limit-liability-from-the-oil-spill/

http://ftalphaville.ft.com/blog/2010/06/14/260101/for-bp-breaking-up-is-hard-to-do/

http://www.nola.com/politics/index.ssf/2010/06/treasurer_kennedy_seeks_state.html

http://ftalphaville.ft.com/blog/2010/06/21/266581/bp-and-anadarko-turn-on-each-other/

http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/7840455/Oil-spill-BP-to-sue-partner-in-Gulf-oil-well.html

http://www.bbc.co.uk/blogs/thereporters/markmardell/2010/06/the_gulfs_heavy_price_for_bps.html

http://www.wired.com/wiredscience/2010/06/bp-nightmare-email/

http://www.brightknowledge.org/news/null,3346,AR.html

BP Heading For Restest Of 2003 Low?

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BP_lows

Click for bigger

After three brutal months for bullish investors, it looks like BP could tag its 2003 lows. What's next for for this stock? Is it a long term bargain here, a short term bounce or is it toast? Any thoughts?

BP Shares' Losses Top $100 Billion (WSJ paywall)

BP PLC shares dropped as much as 9% in London on Friday, putting the
drop the oil major's market capitalization at more than $100 billion
since the Gulf of Mexico oil spill began, as an analyst suggested the
company needs to sell stock to assure counterparties of its financial
health.

As U.S.-listed BP shares dropped more than 3% in early
trading, the hit to its market capitalization since April 20 grew to
roughly $102 billion as the oil giant plumbed a fresh 14-year low.

End-June/Early-July Sub-Wag

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Although there may be a bit of wishful thinking on my part here (since a bit of a push for next week would suit me very well), I genuinely think the next movements in the market will resemble this:

0625-subwag

We've nicely achieved the push into "green tint", and a relief rally to 1100 followed by a subsequent drop, retrace, and then hard drop, would be a thing of beauty.

A Big Change……..for a Week

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There are only three days left this quarter, and having had four profitable days so far this week, I was deeply pondering this morning what to do. There were basically two very different roads I could take:

SAFE – The safe road is one that takes risk down to zero and guarantee I can close out this quarter profitably. It calls for the elimination of positions at the expense of possible profits to be had by a drop in the market (since I am bearishly positioned).

OPPORTUNISTIC – This road demands that I simply "stay the course" and do what I always do, which is keep stops updated and take new opportunities as they appear. It exposes me to the prospect – – albeit slim – – of turning a profitable quarter into a losing one, but it also keeps me open to the possibility of more profits.

I am, by nature, a risk taker, but after thinking long and hard about this, I have taken the Safe road. There are a few reasons for this….

(1) I want to bag a good quarter. 

(2) I think the market is more prone to a push higher now (albeit briefly) than a push lower. I saw last night that interzone was asking me if I felt EWI's projected push higher was represented by yesterday's action. The answer is an emphatic no. I think that push higher is going to take place next week.

(3) Being "out of the office" next week severely hampers my ability to trade large numbers of positions effectively. I need the screens, the computing power, and the uninterrupted concentration to do this well. I am going to basically take the week off.

Of course, by doing this, I am exposing myself to the prospect of the market tumbling hard next week and missing out on the profits I have worked very, very hard to capture. I think the possibility of such a tumble is slim, however, and as I said, I'd rather be assured an "up" quarter more than anything else.

So what does this mean to you, as a Sloper? It means I'll be talking a heck of a lot less about individual selections, since my trading will be limited to just a handful of ETFs, and probably just on a day-trade basis. Instead, I'll probably be sharing more anecdotes (like my milk-shake-winning arrow shot through the apple last year, pictured below) than trading war stories. It also means, if we do push higher, that I won't be yelping about it, because it won't be hurting me.

0625-arrow

As I type this, I have gone from 160 positions to 3…….yep, 3! They are all long – FXE, GLD, and IWM – and they are currently all profitable. Having just a handful of ETFs is going to be par for the course until July 6th, at which time I will go balls-out trading once again.

Thank you.