Last Updated Jun 1, 2010 9:58 PM EDT
That was the main factor accounting for the drop, but there were others, mainly the call by some senators for criminal investigations into BP's actions before the Deepwater Horizon accident on April 20. Apparently there is no situation desperate enough that some politicians won't risk inflaming it with vituperative, populist rhetoric if there might be a few votes in it one day.
I thought BP's stock was worth a speculative purchase when it was trading in the high $40s, about halfway through its decline (so far). Based on huge corporate accidents of the past, such as the 1989 Exxon Valdez oil spill, I called the selling in BP "an overreaction based on emotion and not an adjustment based on a reasonable estimate of the impact that the accident will have on BP's financial condition and reputation."
I clearly underestimated the fear on Wall Street and the wrath in Washington, but I still expect BP's stock to recover. Here are some existing or potential developments that could get the stock moving higher again once the panic and anger subside:
We're all in this together. Members of the Obama administration have threatened to take control of the well-capping operation and then backed off. Either they will keep quiet and admit tacitly that they do not have the expertise to stop the leak or they will follow through and prove that they don't. Either way, it could win some sympathy for BP.
Letter of the law. An article in the Wall Street Journal cited three requests to federal regulators - all of which were approved - to make changes to pipes used in Deepwater Horizon just before the accident. The inference that investors are likely to draw first is that BP knew that the well wasn't working properly and was clueless as to how to fix it. When the crisis moves from the Gulf of Mexico to some courthouse or another, BP can present it as evidence that it was aware of the problems and working to resolve them and that regulators had given the company their seal of approval - three times. The fact that the requests were granted almost immediately suggests that there was nothing out of the ordinary about them and that the accident and spill could not have been foreseen, no matter how certain it appears to some in hindsight.
In for a drop, in for a barrel. The harm to the Gulf Coast and the Gulf itself is extensive, and the urgency to cap the well remains. But at this point the environmental and financial impact from each barrel of oil that's released is bound to diminish.
Foul-weather friend. Hurricane season began Tuesday, and it is expected to be an active one. That could hamper efforts to cap the well. As ironic as it may seem, however, with the region still recovering from Hurricane Katrina five years ago, it could also help to accelerate dispersal of the oil out to sea, limiting BP's financial liability.
So cheap, it's worth the trouble. BP's stock has been hammered so relentlessly that it trades at less than five times analysts' estimates of next year's earnings. The massive cleanup and legal costs of the spill almost guarantee that earnings will come in below those estimates. But BP is undeniably cheap by another yardstick that investors seem to be overlooking. Its market value Tuesday of $114 billion means that each of the company's 18.3 billion barrels of proven reserves costs about $6.20. That's barely half of the $12.10 that each barrel of reserves of Exxon Mobil (XOM) costs. That discrepancy could be great enough for a rival to try to launch a takeover bid for BP and grab its reserves on the cheap, viewing as a strength what Wall Street only sees as a weakness - the fact that BP still has plenty of oil left in the ground.