Something's really got my goat... I wasn't going to talk about BP today, but something I saw on Question Time stirred me into action.
The Deepwater Horizon oil spill is no longer a straightforward corporate disaster story. Now it's all about politics. And that means you can forget about valuing BP on any rational, fundamental basis. BP is moving from buy-and-hold investors and into the hands of short-term traders.
When I wrote to you last Monday, BP's shares stood at £4.40. I advised caution over optimism, and itturns out I was right. The shares fell to £3.50.
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Let's have a look at the cold politics at play here and see if there's a trading opportunity to be had.
Who's really to blame here
We don't know who'll ultimately carry the can for this fiasco, but certainly BP's culpable to some degree and they've never tried to hide it. But to listen to the US politicians, you'd think that they're reeling against colonial plunderers on US soil.
But wait a minute. Just about every decision taken and operation undertaken in the Gulf was by Americans. After all, BP as we know it today was formed when it merged with the American producer Amoco back in the 90s.
And what about Transocean and Halliburton, the American firms that owned the rig and were doing the work? Sure, they're doing their level best to paint BP as the bad guy, but they won't escape blame. And who was regulating these operations off the US coastline?
For political reasons Obama is making this a 'them and us' issue. Whereas in reality, there's only 'us'.
BP pays billions for drilling rights and billions on top of that in taxes to the US. So why didn't the US authorities set aside some cash for emergencies? Accidents happen, and as far as I can tell, America is lucky BP has the resources and commitment to clean up this terrible mess.
As shareholders, we're not asking for gratitude, so much as understanding.
This is a political hot potato
Back to Question Time.
Labour MP Ben Bradshaw suggested that Obama's rhetoric on BP is justified. That it's okay for the BP's share price to fall; after all, they've got to pay for the clean-up. But he's missing the point: BP's fall has little to do with clean up costs.
They've said they'll pay out 'what it takes', including claims from local industries. Stoically, they're leaving the arguments over who picks up the final tab until later.
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Perhaps Hayward should never have gone to the States and provided the British figure-head for the local politicians to scapegoat. Perhaps it would have been better for the local managers to take the heat. The stiff British upper lip hasn't served our interests.
But let's get this straight. BP can and will pay for the clean up.
What's concerning the shareholders is politics. Obama's looking for 'ass to kick' and you get the impression he wants to screw BP for everything they've got. And that means our savings and pensions.
We need some political balance
So thank heavens Mr Bradshaw isn't batting for our side in this debate. Labour did enough damage to our pensions when in office, but I digress...
I'm hoping Whitehall provides some political balance this week, as Cameron discusses the issue with President Obama.
BP shares are going to bounce around while the politicians pass the hot potato around.
And this could provide some opportunities.
If it's volatile, it's tradable
As I said on Monday, if you're interested in BP as a long-term holding, my advice is to wait until the air has cleared. I reckon that will take a good six weeks. Then we'll be better placed to assess a fair value for the stock.
But if you want to use the volatility to trade in and out of BP, you may get some great opportunities.
The shareprice is now in uncharted territory. Trading around £6.50 before the crisis, they hit a low of £3.50 Thursday morning.
Uncharted waters means there's no trading range and that means this is a dangerous play. But volatility means tradability...
A limit order to buy at £3.60, with an exit around £4.30 offers 20% upside (although you should never set your orders at 'round' figures, pick something just inside). I haven't got the time to go into my reasons for these figures -and come Monday, it may all be change anyway.
In fact, we may never get the chance to get back in at £3.60, and even if we do, we could see some losses. It all just depends on the politics.
Remember, this is trading, we're looking to take advantage of volatility. Don't get into these sorts of trades if you're not prepared to suffer losses. Though my old buddy used to say "don't worry... if the trade turns sour, we'll end up with an investment". But I suspect we'll get out before then.
This article was written for the free investment email The Right Side.
Spread betting is not suitable for everyone - ensure you fully understand the risks involved and never risk more than you can afford to lose. Spread betting carries a high level of risk to your capital. Prices can move rapidly against you and resulting losses may be more than your original stake or deposit. Margin amounts vary between spread betting companies and the type of markets spread bet. Commissions, fees and other charges can reduce returns from investments. Tax treatment depends on individual circumstances and may be subject to change in the future. Your capital is at risk when you invest in shares - you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Theo Casey. The Right Side is issued by MoneyWeek Ltd. MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
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