Our indicators are screaming BEWARE, markets rallied hard at the word go ! , DJIA is 10125 as we type (+2.2%), Spain up 4% at 9250, Dax 6075 (+1.4%). Japan remains the weakest, alongside FTSE (thanks to BP).

We were researching on BP’s misfortunes – being ignorant to it in the last few weeks. Is this the time to jump in? It makes about $14-16 billion per annum – with a market cap of 91b at the moment. It has over 10 billion barrels of oil reserves (over 5 billion under BP and >4 billion under its subsidiaries). A few factors we thought were important on top of the obvious legal repercussions of the spill.

1. How much oil is leaking per day? Does Deepwater Horizon form a large part of BP’s reserves?

We couldn’t find an answer to this. BP’s estimates are 1000 barrels a day, whilst “experts” from the US are estimating up to 95,000 barrels a day just by looking at the video of oil gushing out. Pick a number! If it was the highest estimate, thats almost 1 million barrels of oil every 2 weeks, or 28 million barrels a year. Is that a significant % of BP’s total reserves? Its “a drop in the ocean” if you look at their reserves below:

BP oil reserves

Which brings us back to the legal/financial impact. What is the final bill going to be? We’ve read that BP is self-insured, but other reports say they have reinsurance (probably do, but not much). The upper end of the bill so far in the media goes to 3.5 billion dollars – if that was the case, then we would jump head first to buy before it gets taken over. BP’s financial statement for the last few years summarised below:

BP Cash flow and Financial Statement

Now, for the most interesting (and unfounded) part of the analysis: look at the chart below.

IS BP leading the Dow Jones???

We put both on the same chart, Y-axis being the percentage change going back all the way to 1977. As we said, there is no basis for this, but BP and the Dow tracks each other very well in the last 33 years!

BP vs DJIA

We are going Short Dax $20 at 6070, stop loss 200 points.