Obama Could Bankrupt BP's US Unit: Investment Officer
Published: Thursday, 10 Jun 2010 | 7:33 AM ET Text Size
By: Patrick Allen
CNBC Senior News Editor
Having watched one of the most valuable companies in Europe lose nearly half its value in just over a month, investors are questioning at what point BP becomes a buy.
But some are worrying that US President Barack Obama's rhetoric could bankrupt the company's American arm.
Shares in the UK-listed oil major, which is battling to stop the environmental disaster in the Gulf of Mexico, are again falling in London after more tough talk from the Obama administration on funding the cost of the clean up.
Obama, who told NBC earlier this week that BP [BP 32.03 2.83 (+9.69%) ] CEO Tony Hayward would be fired if he had his way, is under big pressure to get to grips with a crisis that until now he has not been able to influence.
Pressure is growing on BP to cut its dividend and stop spending money on advertising, despite the firm’s assertion that it will be able to meet the costs of cleaning up without doing so.
This dynamic is the reason not to buy the stock, said Louis Gargour, the chief investment officer at LNG Capital. Gargour also warned that the risks of doing so far outweigh the potential rewards.
“Since his election President Obama has had very few successes. Under pressure from voters just months before mid-term elections, he needs one badly and BP offers him that chance,” he said.
This victory will be disaster for BP and those still holding the stock, Gargour said. “I believe they could try to bankrupt the US arm of BP and take it into public (state) control,” he added.
Investors have been asking at what point you can buy this story and questioning if when Hayward is forced to cut the dividend the stock would be a buy.
This is a binary trade and the potential upside is far smaller than the possible downside, according to Gargour. “If Obama bankrupts BP’s US arm you are sat on further losses of 60 percent, if BP gets lucky your upside gain could only be 20 percent, this is not the time to buy BP,” he explained.
Famous investor Jim Rogers, chairman of Rogers Holdings, told CNBC on Thursday he is not buying BP either. "I wouldn't judge it on price; I would judge it on time,” he said, meaning investors should get interested when the oil spill problem drifts away from the public eye.
"Eventually, this, too, will pass," Rogers said.
Nassim Taleb, the author of the “Black Swan” expressed reservations during an interview with CNBC on Thursday about the future of BP given the catastrophic fall in its market capitalization since the oil spill on April 20th.
He suggested that incentives in corporate culture are inherently flawed.
"Size is bad for companies," he said. "We shouldn't give a manager of a nuclear plant an incentive bonus. People are given bonuses to hide risk, to cut corners. The same thing happens with every large corporation. It permeates the entire economic system”
BP has enough cash and businesses outside the US to cope with whatever the US throw at it, Peter Sorrentino, a senior portfolio manager at Huntington Asset Advisors, told CNBC.
“They could walk away and say keep your pipelines and still be a major player on the global market,” Sorrentino said.