Mainly About Fund Managers & BP

Do some mutual fund managers know something about BP that we don’t or rather the wider market does not?

The answer is a flat ‘no’. Following the Gulf of Mexico oil spill which began on April 20th, BP’s market value has declined 40%. All what these guys did was not react to the headlines. That is simply because they saw an opportunity based on the conjecture that BP is too big to file for a US Chapter 11 bankruptcy (even if it wanted to).

One contact of mine in the industry says, “When others panic we don’t. On the contrary we see value in a cheap stock because let’s face it - BP is not going to go bankrupt despite all the garbage in the popular press. Four weeks ago its stock was as cheap as it can get.”

There is a thought process behind all this. To begin with, the crude oil price has averaged US$78 a barrel for the first six months of the year and many in the market believe it will end the year above the US$80 mark. Furthermore, the oil giant’s financials indicate that it has been raking in over US$30 billion in operating income each year in recent financial years.

Additionally, BP is methodically making asset sales. It is in negotiations with US developer Apache Corp. with regard to a massive asset sale to the tune of US$12 billion according to UK media reports. Some reports are also naming Standard Chartered as the bank responsible for setting up the oil giant’s crisis fund of US$5.25 billion launched in May.

In a related development, Magellan Midstream Partners announced that it has agreed to acquire certain petroleum storage and pipelines for US$339 million, including about US$50 million in inventory from BP Pipelines (North America) Inc. Moody’s notes that the move will not impact Magellan’s Baa2 senior unsecured debt ratings and stable rating outlook at this time. Its rating has stayed at Baa2 since March 5, 2009.

Meanwhile BBC news has just reported that BP has temporarily stopped oil from leaking into the Gulf, pending further tests. A spokesman confirmed that further work is being carried out. Elsewhere political pressure continues to mount on the oil giant as US media reports suggests it could potentially be hit with a 7-year drilling ban.

Away from the oil spill, uncertainty off the Falkland Islands continues as shares in Falkland Oil & Gas fell sharply after the company said it would give up on one of its oil wells – Toroa – off the coast of the South Falklands.

Despite its optimism in May when it started drilling, the company now says there are no hydrocarbons there and it will plug the well. However, it said that it still hoped there was oil in the area. In June, Rockhopper Exploration said it was looking to raise US$75 million after striking above-expectation reserves of oil in the region. A number of the small scale UK oil & gas upstarts are searching for oil in the Falklands, despite strong opposition from Argentina.

Argentina and UK went to war over the Falkland Islands in 1982 after the former invaded. UK forces wrested back control of the islands, held by it since 1833, after a week long war that killed 649 Argentine and 255 British service personnel. The Islands have always be a bone of contention between the two countries. The prospect of oil in the region has renewed diplomatic spats with the Argentines complaining to the UN and launching fresh claims of sovereignty.

© Gaurav Sharma 2010. Logo courtesy © BP Plc