May 2010, what a down month – will June be similar? I prefer the contrary. For the 14 down days in May, the DJIA had officially closed on average 130 points above intraday lows, potentially suggesting that investors have been buying more often than seldom on weakness.
On June 9, an excessive selloff in BP (BP) implied that investors had taken advantage on June 10 as BP had closed above 12%. Consider the following press release where BP stated how they are generating significant cash flow to thoroughly respond to the situation and that the movement on June 9 was again, excessive and not at all warranted.
As a speculative investment, an appropriate allocation to BP can be shrewd. With roughly 42,000 claims and 20,000 payments already made, I do not see claims against BP growing significantly months on out. Although BP does expect claims to rise throughout the month, I assume the majority who would file a claim against BP already have taken action or will within the next 2-3 months. The moral hazard of businesses and individuals that have not been affected by BP’s situation seeking to take advantage of the company coupled with potential civil lawsuits I feel is not enough fuel to drive BP towards a bankruptcy filing.
As of March 31, 2010, BP had $6.8 billion in cash and cash equivalents. BP’s current ratio, a simple calculation of current assets to current liabilities, reads 1.1281. Even when subtracting from cash and cash equivalents the current cost of $1.5 billion from the oil spill and another, let’s say, $5 billion to compensate for continued expenses, holding all other items constant, the current ratio is still 1.0229, meaning BP is still capable of meeting its short-term obligations.
Criticism from environmental organizations and especially the Obama Administration should also be expected but not confused for set-in-stone decrees that could bring BP to its demise. The Obama Administration must, for its own reputation, scare investors out of BP, or at least make them think twice about owning the company. However, a failed BP would be terrifying for Europe and therefore potentially detrimental to US equities. So does the Obama Administration really want to bring BP down? Most likely not.
Soon enough, BP will find the solution and everyone will then again move forward.
Full disclosure: No positions
