Capitalizing on Oil Chaos

05/10/2010 12:05 pm ET | Updated May 25, 2011

Quick now, which is the most hated company in America?

If you're about to say Goldman Sachs, the subject of a criminal investigation and a Securities and Exchange Commission suit charging it with fraud, you're late to the party. That outburst of hate largely occurred a few weeks ago during which a group of current and former Goldman officials testified at a Congressional hearing and turned America's stomach with a sickening display of arrogance, evasiveness and incompetence.

The new culprit and hands-down worst guy is energy biggie British Petroleum, which recently suffered a disastrous oil leak in an underseas well off the coast of Louisiana that left 11 workers dead, polluted the waters, ruined beaches and killed fish and wild life. Since the company has had its fair share of accidents in the past, this spill -- which may cost it an estimated $300 million to plug with relief wells -- seems to be conveying a clear message that safety isn't a priority at BP..

The latest spill, which importantly, some observers say, may provoke a major setback for offshore drilling for decades, was not only an environmental disaster, but a market disaster, as well, stripping British Pete investors of more than $25 billion worth of market value as the shares tumbled about 14%.

But out of adversity, they say, is often born opportunity, and the BP stock plunge may be a case in point. That, at least, is what I hear from one of Wall Street's most respected energy analysts, Fadel Gheit, who tracks the oil and gas industry for Oppenheimer & Co.

"I would be a buyer of the stock right now," Gheit tells me. "Twelve months out, I think you're looking at a $60 stock." Such a rise would represent about a 22% gain from its current price of around $49. So far this year, the stock is down about 18%, with most of the fall taking place in the past four weeks.

Why such a projected nifty rise in a sloppy market? For starters, Gheit points out, big earnings -- more than $22 billion, he estimates, in 2010. BP posted a first-quarter profit of $5.6 billion, and the analyst believes each of the next three quarters could produce similar kind of earnings gains, excluding the costs of cleaning up the spill.

But what about those clean-up costs, which are already being pegged in some Wall Street quarters at between $10 billion and $15 billion. Gheit ridicules such estimates, saying no one really knows and which he thinks are likely to run significantly lower. In any event, he notes that BP has launched what he calls an "historic invasion" -- like the Allies did in Normandy -- by hiring 3,000 boats and hundreds of people to help clean up the mess. So far, one of the leaks in the underseas well has already been plugged up.

Gheit figures that in the next two to three months, the company could come up with an intelligent assessment of the damage. And if it's lucky, the cleanup could begin in earnest at that stage and be completed by year end.

Looking at the whole of the energy sector, Gheit's favorite stocks -- all independent oil and gas companies and none of which is exposed to offshore drilling -- are Pioneer Natural Resources, Devon Energy, Chesapeake Energy and Occidental Petroleum.

Bob Berke, a former energy analyst and consultant for TrimTabs Research, also takes a positive view of BP, rating it a speculative buy. He does think, though, its CEO, Tony Howard, is likely to be canned.

Berke further thinks the oil spill is likely to lead to a higher oil price (currently about $75.25 a barrel). Goldman Sachs is projecting a rise to $94.50 in three months, and Berke thinks a $90-$95 range is a realistic expectation by year end. As related to the oil spill, he sees prices headed higher due to a number of factors. In particular, he points to the possible closing of shipping channels in an area that handles more than one million barrels a day, the likelihood of a significant rise in insurance rates for drilling and the probability that cleanup and rescue efforts may be complicated as the Gulf Coast is just entering the hurricane season.

Given the abundance of available oil and the prospects of a weakening European economy, it's worth noting that a forecast of $90-a barrel plus oil by year end could be overly optimistic.

As for talk of a sharp curtailment generally in offshore drilling, Berke is skeptical, observing "we can't get rid of ocean drilling because we need it too much."

The bottom line: If you buy BP, you're in effect betting on hate -- a hated company right now that has screwed up in the past and created a lot of anguish in the process. But then again, when it comes to making a buck on Wall Street, since when has it ever been relevant for anyone to distinguish between love and hate, or the good guys from the bad guys? Likewise, capitalizing on chaos is all part of the investment game.

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