Stephen Pope Comments: New Troubles For BP And Its Investors

July 19, 2010, SmartMoney

This week could be off to a rocky start for BP (BP: 35.47*, -1.63, -4.39%) following concerns that the cap the company placed on the Deepwater Horizon oil well may be leaking already. On Sunday, a U.S. government official expressed concern in a letter that BP's cap could be seeping oil or gas on the Gulf of Mexico’s seafloor and requested a written plan of action from the company.

Before the letter, BP had hailed the cap as a success because it appeared to have stopped the flow of oil since Thursday. Now, renewed danger of an oil leak could present another setback for the company, which has come under scrutiny from the U.S. government, lost billions of dollars from the spill and the cleanup and seen investor confidence decline.

BP has confirmed a seep but says its source is unclear.

A test of BP's cap was originally scheduled to last about two days: If the cap held for that long, a renewed leak seemed unlikely. By the close of trading Friday, BP’s stock was up 8.9% for the week, with most of the gains following the stop to the oil leak. However, shares fell again Monday on investor concern.

“Many ‘buy’ recommendation analysts were jubilant at the end of last week when the cap was fitted and BP said [it] had stopped the leak,” says Stephen Pope, chief global equity strategist at Cantor Fitzgerald in London. He adds that it’s not unusual for small bubbles of gas to seep from the seabed and that it’s not clear if this is a leak or biogenic gas. Pope says concerned shareholders should consider several factors, including uncertainties about the well’s containment. “Today BP said the clean up cost had risen to $3.95 billion, and the only certain things are that the cost will keep rising. When this is over, BP will have to be a smaller company, so the real direction of shareholder value is far from certain.”

Adding to BP’s problems, the company's talks to sell half of its stake in the Prudhoe Bay oil field in Alaska to Apache Corp. (APA: 85.30*, +2.56, +3.09%) stalled this weekend. Last week the companies appeared on track to finalizing the deal with Apache, making the purchase for around $10 billion, according to media reports. If the deal collapses, investor confidence could be shaken. BP must raise additional capital to help cover costs related to the spill. Along with BP’s existing lines of credit and reduced capital expenditures, asset sales are necessary to “ensure ample liquidity to fund all estimated spill-related obligations over the next several years,” Mark Gilman, an oil analyst at The Benchmark Company, wrote in a report earlier this month.