Investors bet on rebound in BP and other oil shares

LONDON/NEW YORK Thu Jun 3, 2010 12:05am IST

A substance smeared on the sign of a BP gas station along Houston Street in New York, June 1, 2010. REUTERS/Shannon Stapleton

A substance smeared on the sign of a BP gas station along Houston Street in New York, June 1, 2010.

Credit: Reuters/Shannon Stapleton

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LONDON/NEW YORK (Reuters) - BP is struggling to plug a massive oil leak at the bottom of the Gulf of Mexico, but the flow of investors away from oil stocks and bonds seems to be ebbing.

Some investors see this as a rare buying opportunity. Others said the stocks could underperform for years despite reduced valuations. They warned the uncertain outcome of the oil spill and risk to profits means investors should expect a bumpy ride in coming months.

BP has seen its shares fall 36 percent since April when the spill began. The company, now facing an Obama administration criminal investigation, has lost one-third of its market value or about $67 billion (46 billion pounds) since the April 20 explosion that killed 11.

"We are seeing some hedge funds have started building stakes. Political risk is driving the stock price down and makes it highly speculative. It could be value or could be a major break-up," a Zurich-based trader said.

The company carries a one-year forward price-to-earnings (P/E) of 5.74, the lowest among the oil majors.

Of those directly involved with the spill, rig operator Transocean (RIG.N) has lost 46 percent of its value since April 19. Anadarko Petroleum Corp. (APC.N), a part owner of the well, is down 41 percent, and Halliburton (HAL.N), which provided cementing services on the well, is down 26 percent in that period.

Those companies and others are going to be hurt by a moratorium on drilling imposed by the Obama Administration. But investors say the value of existing holdings, such as the rigs and drilling platforms, means plenty of value remains in the stocks despite the near-term outlook for profits.

"We think it's gotten too cheap," said Gary Bradshaw, portfolio manager at Hodges Capital Management in Dallas, who recently increased his company's position in Transocean. "Obviously the six-month moratorium is going to hurt their earnings."

OFFSHORE SHARES COULD FACE PRESSURE

BP worked on a new plan on Wednesday to siphon off some of the leaking oil by first using robot submarines to cut away what is left of the ruined offshore well's riser pipe after a failed "top kill" attempt to plug the well, as Washington launched criminal and civil probes into the disaster.

Fred Dickson, chief market strategist at D.A. Davidson & Co in Lake Oswego, New York, said the share prices of those more closely tied to offshore activity could face more pressure.

"We're going to have a litigation cloud hanging over the companies involved in the Gulf spill, and that could be 10 to 20 years," he said. "I think investors that have to be in energy will have be in onshore plays or look to companies that are pulling most of the oil out of places not in U.S. waters."

The cost of insuring the debt of BP Plc, Transocean and Anadarko hit fresh highs on Wednesday as they face temporary drilling bans in the Gulf of Mexico and hits to profits due to the costs of cleaning up the disaster.

Credit default swaps protecting BP's debt jumped 87 basis points to a record 255 basis points, or $255,000 per year to insure $10 million for five years, according to Markit Intraday.

Options activity suggest investors expect more gyrations in individual stocks. Transocean's option implied volatility -- the expected magnitude of share price movement -- is moving up along with the oil driller's credit default swaps, said Frederic Ruffy, options strategist at Web information site WhatsTrading.com.

Ruffy noted Transocean's average option implied volatility is still rising to multi month highs, currently at about 91 percent compared to the low 30 percent before the disaster happened in late April. It indicates "some investors are bracing for additional turbulence in the share price," he said.

(Additional reporting by Blaise Robinson, Dominic Lau, Harpreet Bhal, Caroline Valetkevitch, and Doris Frankel; Editing by Andrew Hay)

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