Events Trader #53: Buy BP before it soars back to 615p

6th May 2010

Buy BP before it soars back to 615p

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I haven't been able to take my eyes off events in the Gulf of Mexico for the last week. Ever since the Deepwater Horizon rig exploded, the story has gotten more dramatic by the day.

First, there was the suspense about the poor roughnecks who sank into the sea with the exploding rig. Then there were the desperate efforts to contain the oil leaks. Now a monster slick has reached the Louisiana coast - and is threatening to destroy the local shrimp and tourist industries.

I can't be the only one fascinated by the grim details. Because in the time its taken for the saga to unfold, more than $40bn has been written off the market capitalisations of the four oil groups operating the Deepwater rig. $40bn! That is a catastrophic writedown.

And I think that is a huge overreaction. I think it's time for us to take a punt on the oil group who has been hit hardest by this crisis BP.

A savage week for BP

BP has been absolutely savaged this week - falling from 640p before the rig exploded to 572p today. As field operator for the Deepwater rig, the market is concerned that BP could be liable for a great deal of the costs from the clean up.

The drilling platform itself was operated by Transocean (RIG) on behalf of BP. The trouble started when a safety lock on the drill failed to stop a blowout 1,500 metres below sea level. Now the well is gushing over 5,000 barrels of crude oil a day into the Gulf. And is rapidly becoming the worst ecological disaster to hit the US since the Exxon Valdez destroyed the Alaskan coastline in 1989.

BP stock fell even further after news that the US justice department was investigating the spill and might decide to bring criminal charges against the company. The stockn rebounded yesterday on what I suspect was some short covering.

Worries about the market collapse have also contributed to the fall in BP's share price too. Now looks a great time to get in on this trade for three reasons.

3 Reasons you should buy BP now

This is the worst accident in 40 years in the US. But it could be down just to bad luck rather than poor management or excessive risk. This could very well be reflected in BP's share price in the weeks ahead.

Secondly, this accident is not really BP's fault. The platform was leased and operated from Transocean [RIG US] and the safety valve that failed on top of the oil well was designed and placed in situ by Halliburton [HAL US].

On top of that, efforts are being made to create a giant plug that will stop the flow of the underwater well. This is expected to be placed today. And spills like this can be cleaned up over the course the coming weeks.

The cost of the cleanup operation is put at $3-5bn, which is only 30% of BP earnings for this year. If BP gets fined because it is found to be criminally negligent (an unlikely event) such as Exxon in 1989, it risks a fine that can be up to 1 year of profits (Exxon still has not paid up).

What you should do now

So I would recommend that you buy into BP at 572p. The target for this trade is 615p and we will fix the stop loss at 500p.

The main risk with this position is the general election. There is a risk that the market might fall if this Friday we wake up and have an hung parliament. If that happens BP could fall just because it is a big constituent of the FTSE 100.

But this would actually be unreasonable because BP is an international company with asset and revenues around the world. In any case, I am placing the stop loss so low because I do not mind staying long on this stock if it fails to rally immediately. And believe it or not I might even double up if it falls further. I regard BP as a very good company and this event as a good point to enter.

If you like you can contact me at my e-mail eventstrader@moneyweek.com.

Riccardo Marzi

Events Trader

Your capital is at risk when you invest in shares, never risk more than you can afford to lose. The share recommended is denominated in a currency other than sterling. The return from such shares may increase or decrease as a result of currency fluctuations. Please seek independent personal advice if necessary.

Figures are calculated using the closing mid-prices on the date on which shares are first recommended. All gains are gross, and returns will be affected by dividend payments, dealing costs and taxes. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments.

Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Editors or contributors may have an interest in shares recommended.

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