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A bullish case for BP Add to ...

It would be a lot easier to make a bullish argument for BP PLC shares if the world wasn't coming to an economic end (again). But damn the torpedoes, the case is compelling enough to make it anyway.

The company is staring at a nasty and brutish problem to be sure. Eleven men are dead. The Gulf of Mexico well is still leaking 3,000 barrels of oil a day. Relief wells are a couple of months away from being drilled. The cleanup will cost BP and its partners an unknown but, it's safe to say, a breathtaking amount of money. The tourism industry in the Florida Panhandle is all but dead, which gives the tort lawyers more ammunition. And the disaster might lead to tougher rules on deepwater drilling, an activity BP has come to count on to maintain reserves and production.

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You have to make a mighty effort to underestimate the fallout. But let's look at the numbers. Since this catastrophe punched a hole in BP's market cap it has leaked about a quarter of its value.

That's about $50-billion (U.S.). Now, some of that loss is not strictly related to the Gulf spill - which, incidentally, is the worst BP has ever faced but by no means the first. Some of the drop in value can be blamed squarely on those Europeans and their mess.

But most of it - call it $40-billion - is because of the leak. Let's think about that: BP is not the only liable party. The rig was owned by Transocean , and Halliburton Co. was the drilling contractor. BP is the operator and majority owner of the lease. The point is that all parties will bear part of the cost of this debacle.

According to stock brokerage Oppenheimer & Co., Transocean is responsible for the operation of the rig and its equipment, including the blowout preventer, and for drilling the well. The lease owners, BP and its partners, are responsible for the costs of regaining control of the well and handling the related environmental costs.

Transocean's stock has also been cut by a third, for a total loss of about $10-billion. Let's say $8-billion of that is because of the Gulf accident. And let's call Halliburton's lost value $6-billion. We're now talking about $54-billion of evaporated market value that's arguably related to the incident.



Now that's a present value. The costs are going to be paid over the next decade or more, as is always the case. Taking that into account, investors seem to be saying that the costs could be, say, $70-billion, after insurance.

Question: As I said earlier, the costs will be huge. But $70-billion? That's rich - very rich. Too rich, I would argue. The Valdez spill cost Exxon about $5-billion. That was 20 years ago and it was in some ways a smaller accident, but it's still a telling statistic.

Another reason for that argument, beside the sheer magnitude of the numbers, is that there's no clear culprit. As mentioned, there are three companies that are potentially liable. But government agencies are also on the hook. The interior secretary admits to lax oversight at the agencies responsible for policing offshore drilling.

And the truth is that the rules are hazy because deepwater drilling is the new frontier. Practices and technology change often. They have to.

Another argument, a powerful one, is that to punish the players responsible for this accident too hard would not be in the United States, or western countries', interests. Offshore drilling is crucial to oil supply, especially non-OPEC supply.

BP America depository receipts are now quoted at six times earnings and yield 7.4 per cent. It's interesting that the stock did much better than the energy index Thursday. In fact, although it closed lower, it was higher at various points during the trading session. It appears that the early bargain hunters agree with this assessment.

 
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