Inside Wall Street: Support for BP's Stock Is Steadily Slipping

Gene Marcial's Inside Wall Street
Gene Marcial's Inside Wall Street

Beleaguered BP (BP) has become a conundrum for Wall Street. As the embattled oil giant struggles with a myriad of disastrous oil-spill related problems, BP's stock price has plunged to $29.68 a share from a 52-week high of $62.38 back in January. So while the stock has cratered to depths that suggest to some analysts that BP shares may now be a bargain, BP's seemingly unstoppable troubles continue to escalate -- with no visible end in sight.

And more investors are coming to believe that BP CEO Tony Hayward is another handicap for BP's management, as evidenced in part by his abysmal performance when grilled for answers last week by a congressional panel.

Could such an inept CEO who failed to articulate credible answers to questions thrown at him by members of Congress be able to regain the confidence of investors? Unless he's ousted as CEO, contend some investment pros, investors will likely find it more difficult to trust BP's management again. Although Hayward was relieved last week of leading the capping and cleanup of the worst oil spill in U.S. history, he remains BP's chief executive.

How Big Will the Cracks Get?

So how do the oil experts on Wall Street evaluate a stock burdened with so many unknowns?

Amid such a quandary, what had been an almost solid wall of support for BP's stock on Wall Street is now showing some cracks. The question is how much bigger they'll get.

Several weeks after the Apr. 20 explosion of BP's Deepwater Horizon oil rig in the Gulf of Mexico, Wall Street remained resolutely bullish toward BP's stock, then trading at $62. Of the 15 analysts who track BP, 10 recommended buying the stock then, including analysts at Goldman Sachs, Edward Jones, Standard & Poor's and Oppenheimer. None recommended dumping the shares.

Since June 11, however, the number of analysts recommending a buy has dwindled to seven. Goldman Sachs revised its rating to neutral, Edward Jones downgraded it to sell and S&P rolled it back to a hold. Oppenheimer retained its buy rating but cut its 12-month price target to $45 from $55. Two other previously bullish analysts simply withdrew any rating on the stock.

Damages Could Hit $100 Billion

"Our reduced $45 price target reflects recent developments after the congressional hearings," says Fadel Gheit, veteran oil analyst at Oppenheimer. But there's a flip side: Robert Kessler, analyst at Texas-based investment firm Simmons & Co. surprisingly upgraded BP to a buy from neutral. He didn't return phone calls or emails requesting comment.

London-based Edward Jones analyst Brian M. Youngberg says he downgraded BP to a sell because the major reasons that attracted him to BP are simply "no longer valid as the risk profile has continued to increase." BP's financial position, he adds, will "likely continue to weaken, and the range of potential costs has widened significantly."

Youngberg concedes that he might be proved wrong in downgrading the stock to a sell if the oil flow rate turns out to be less than currently estimated or if the oil leak is stopped soon. But, he warns, the worst-case scenario according to Edward Jones estimates could see the damages to BP mounting to $100 billion, reflecting cleanup costs, various fines, litigation from the economic impact in the Gulf region and other miscellaneous litigation expenses.

"Hard to Overstate the Seriousness"

The key questions of how much oil is spilling each day, how long it will take to plug the leak and how far the oil spill will spread are all important -- and have no answers yet. BP has had numerous estimates on how much oil is gushing out -- ranging from 1,000 barrels a day in April to 45,000 barrels in early June. Government estimates, however, are now as much as 60,000 -- and rising.

"It's hard to overstate the seriousness of the situation," says Robert Mitkowski Jr., analyst at investment research outfit Value Line. The "possibility of sizable punitive damages, fines and penalties could cast a cloud over the stock for some time," cautions Mitkowski, who advises investors to "avoid" the stock.

Some gutsy investors believe BP has become a compelling fire-sale buy. But those seeking an oil play can find other energy stocks that are also way down from their highs because of the pullback in oil prices and the oil spill, but are attractively valued. Those are quality companies -- with far fewer risks to worry about.