Proof you can`t trust Wall Street analysts

Posted by Eric LeRiche | May 28, 2010 .

(Taken from taipan publishing)

Traditional Wall Street analysts are insane. Not all of them, but the vast majority it seems. Either that, or maybe they are just fools.

I don’t care about tailored suits or impressive credentials or number-crunching prowess. A guy (or gal) can sport an expensive suit and a fancy pedigree and still be a dangerous idiot. (If the global financial crisis has taught us anything at all, hopefully it has at least taught us that.)

I bring up the above because it seems that, finally, we have some indisputable proof on our hands. It comes in the form of analyst ratings on British Petroleum (BP:NYSE) shares.

As of Wednesday, The Wall Street Journal reports, 34 analysts still maintained a “buy” rating on BP stock. Eight analysts had the guts to move BP to “hold,” and only one – just one! – put the stock at a sell.

I have just one question for the herd of “buy” rated analysts still bullish on BP stock:

“Are you insane?”

No Concept of Risk

Let us put aside, for a moment, the damfoolishness of maintaining a “buy” rating on a stock with gargantuan political risk.

If BP stock had even a 17% chance – a little over one in six – of getting cut in half or worse, I would not consider it an investment “buy” under any conceivable circumstance. That’s like playing Russian roulette with someone’s nest egg, is it not? Put the stock to your head, hope the bullet chamber is empty, and pray.

So, under normal circumstances, the gross lack of respect for risk embedded in Wall Street’s rating system would be bad enough.

But the situation here is actually far worse, because the odds of BP stock getting crushed by political risk – i.e. fallout from government fines and stratospheric cleanup costs – run much, much higher than 17%.

In fact, if BP’s all-in costs are not measured in the billions (or tens of billions) by the time this whole mess is over, I’ll eat my keyboard.

As I write to you, BP is executing a “Top Kill” operation to seal off the Deep Horizon well. The latest news, as of this writing, is that the wellhead has been “stabilized”… but it is still too early to call the operation a confirmed success. (The news may be different, for better or worse, by the time you read this.)

Pain No Matter What

If the “Top Kill” operation fails – and it still could – then BP is a dead duck. If the situation is as bad as oil expert Matt Simmons suggests, it might take nothing short of a nuclear bomb (yes, a nuclear bomb) to seal off the hole. More on that in a moment.

But even if the unprecedented operation to seal the well with mud and cement is a success, BP’s troubles are still just beginning. Men like Tony Buzbee will see to that.

And who is Tony Buzbee, you ask? Just a hungry Houston trial lawyer preparing to sue the living daylights out of BP.

“This is going to be the largest case in the history of the United States,” Buzbee says. “Even bigger than the tobacco cases. There will be thousands and thousands of cases.”

One of those cases, in fact, will probably be filed by Gary Burris, a local who has been working to help clean up the spill (given the absence of any fish to catch). As Louisiana news outlet WDSU.com reports:

Burris, a longtime fisherman who has worked across the Gulf Coast, said he woke up Sunday night feeling drugged and disoriented.

“It was like sniffing gasoline or something, and my ears are still popping,” Burris said. “I’m coughing up stuff. I feel real weak, tingling feelings.”

Marine toxicologist Riki Ott said the chemicals used by BP can wreak havoc on a person’s body and even lead to death.

“The volatile, organic carbons, they act like a narcotic on the brain,” Ott said. “At high concentrations, what we learned in Exxon Valdez from carcasses of harbor seals and sea otters, it actually fried the brain, (and there were) brain lesions.”

The chemical in question, an oil dispersant called Corexit, has long been banned in the United Kingdom for its link to health problems. What’s more, the U.S. Environmental Protection Agency (EPA) even demanded that BP stop using Corexit and switch to something less toxic – but BP refused.

And now, in addition to having their coastlines and day-to-day livelihoods destroyed, Gulf workers are getting sick. Is it any wonder trial lawyers are drooling?

Evidence of Negligence

Then, too, there are the smoking guns in respect to why the Deepwater Horizon disaster happened in the first place. Here are just a few points that scream “negligence,” as compiled by The Wall Street Journal:

BP cut short a drilling procedure designed to detect gas in the well.
BP skipped a quality test of the cement surrounding the pipe (another key safety measure).
BP ignored warnings of a potential problem from contractor Halliburton.
BP removed the heavy drilling fluid known as “mud” prematurely in order to save time.
BP assigned an inexperienced manager with limited knowledge of deepwater drilling to the rig.
BP ignored a major disagreement over safety procedures the day 11 people died.
BP management overrode Transocean protests, taking unnecessary risks in order to save time.
Subcontractor Kevin Senegal: “To me it looked like they were trying to rush everything.”

In addition to serving as red meat for ravenous trial lawyers, multiple points of negligence dramatically increase the odds of criminal or civil penalties being assessed against BP. That’s where the real financial carnage comes in.

“Running Into the Billions”

Professor David Uhlman, director of the University of Michigan Environmental Law program, agrees with your humble editor’s stark risk assessment as laid out last week. Total liability for BP “will run into the billions and maybe in the tens of billions,” Uhlman says.

While Reuters goes with a more conservative $10 billion figure in terms of outside risk to BP, the U.K. Guardian reports an outside range of $60 billion, based on a confidential U.S. source.

Keep in mind that the original estimate of 5,000 barrels per day in leakage is now widely acknowledged as a joke, with the possible long-run estimate being many multiples of that. The Exxon Valdez disaster was pegged at 11 million gallons. Rough estimates of the BP oil spill – so far – range from 19 million to 39 million gallons.

So far.

A Nuclear Solution

We can only hope that BP’s “Top Kill” solution actually holds… that promises of progress are not just more hot air… and that the wellhead is successfully sealed and remains sealed.

Otherwise, it might be “fire in the hole” – nuclear fire, that is.

“The thing we need to be terrified about,” said energy expert Matt Simmons via phone interview on The Dylan Ratigan Show, “is there might be no way to put this out other than waiting until the giant oil field depletes, which could take 9,000 days.”

Nine thousand days is a little over 24 and a half years.

If the well is indeed “unpluggable” – a possibility that would annihilate the $2.2 trillion Gulf economy, and virtually all Gulf of Mexico wildlife with it – the last-ditch solution would be to let the Navy “drop a bomb down the well bore and try to cave it in.”

A nuke would be novel, but not new. The Soviet Union has done this on at least five different occasions, the Russian daily Komsomolskaya Pravda reported some weeks ago. “Controlled nuclear blasts” – some larger than the Hiroshima bomb – were used by the Soviets to stop oil leaks underground, with the aim of squeezing off the flow via tons of compressed rock.

Can you imagine how that would go over for Americans though? A nuke in the ol’ backyard?

Let us hope against hope, for the sake of all involved, that the worst is over and that BP’s wellhead containment efforts are successful.

Of one thing we can be certain though: Whether the worst is over or far from over, the BP lawsuits and civil liability nightmares are just getting started. Your humble editor would still love to know what those 34 “buy” rated analysts are smoking.

Warm regards,

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