Carrigan Says Beware Of BP Downside

Back in late May I got a call from a local portfolio manager, Bob, asking for a technical opinion on BP PLC whose share price had torpedoed in reaction to the company’s Deepwater Horizon Gulf oil spill. “Take a look, Bil,l because at $41 the shares are cheap when you take into account the earnings multiple, the yield and the book value.”

Bob’s analysis was typical fundamental stuff that reason a falling stock is a better buy than a rising stock because a falling stock is “cheaper” than a rising stock which is getting “expensive.”

I advised against the purchase because the stock was falling faster relative to its industry peers Chevron Corp. and Exxon Mobil Corp. I told Bob the market is clearly worried about the Gulf oil spill and that in many cases stocks will fall ahead of changes in the fundamentals which can lag the current reality.

Today with BP trading in the $31 dollar I still have no interest in the stock because the Gulf oil spill is a crisis that may take generations to repair. Followers of this column know I have always had a “crisis what crisis?” attitude because I have never experienced a crisis that had a profound effect on our way of life.

There was no lasting impact on the capital markets related to the financial panic 1987, the 1990 invasion of Kuwait, the Asian stock market crisis of 1997, the terrorist attacks of 2001 and the Lehman Bros. bankruptcy of 2008. One could argue the Arab Oil Embargo of 1973 did contribute to the dismantling of the North American auto industry.

There has also been several sovereign defaults over the past 25 years, namely the 1982 Mexico and Latin America debt crisis, the 1997 Asian financial crisis, the 1998 Russian financial crisis and the 2002 Argentine default, all of which turned out to be speed bumps for the global equity markets.

In each crisis - no matter how horrific, the problem was solved by printing money. In each crisis - no matter how horrific – there was a beneficiary out there somewhere. One could argue gold was the recent crisis beneficiary, having posted an 11-year advance of almost 400 per cent and counting.

Now I have to concede the current Gulf of Mexico crisis as taken the term horrific to a new level. The very thought of a modern economy such as the United States wiping almost 20 per cent of their coastline is a staggering reality. The root of the problem is we see no end I sight. This is a crisis that could take a generation or more to resolve. This is a crisis that could take down the Obama presidency. This is a crisis that could alter weather patterns and disrupt energy and food production.

Now with all that in mind, what are we to do as investors?

Let us not even think of acquiring the shares of BP at these depressed levels because their entire enterprise could be at risk and as a shareholder and part owner, you become part of the problem.

As investors we have to protect ourselves and seek out the beneficiaries of this crisis and avoid the sectors involved with Gulf tourism and off-shore drilling.

Our chart this week is the daily closes of the NYSE Arca Natural Gas index plotted above the daily closes of BP. The share price of BP peaked on April 20, 2010 and began to slide in response to the initial news of their Deepwater Horizon fire and Gulf oil spill. The price declined into early May at the $40 level and then collapsed in late May on news that “Top Kill” failed to stop the oil spill.

Our upper plot of the AMEX Natural Gas Index reversed and turned upward in late May possibly in reaction to the bad news out of the Gulf relating to the series of failures to stop the crude that’s fouling marshland and beaches. Is the natural gas complex reacting to the possibility of restricted supply due to the Gulf oil spill?

Some experts claim that a blacker oily Gulf could alter the weather patterns in the U.S. which could affect U.S. food production. One has to wonder if we will see higher prices in the AGRA space due to the Gulf oil spill.

Fortunately there are two TSX listed Exchange Traded Funds that allow us to participate in the natural gas and AGRA space. I called Bob and whispered the symbols COW and ZJN and got a lot of dead air. Call your advisor and see if you get a better response.

Bill Carrigan, CIM is an independent stock-market analyst.