North Sea Oil Spill: The Dangers of Headline Risk

From: James Cramer
Sent: Thursday, March 29, 2012 7:07 AM
To: Nicole Urken
Subject: RE: Audible--They can't stop the Total leak -so we can't do it

I know –it is more of a sell that a buy

__

In Thursday’s “Mad Money” show, we were keyed in on the Dreyfus Affair — you know, the political scandal at the turn of the 20th century in France, where Alfred Dreyfus was sentenced to life imprisonment for allegedly having passed along French military secrets to the German Embassy in Paris. While his wrongful conviction — brought to light by Emile Zola’s “J’accuse” — was ultimately withdrawn, this came only after years of imprisonment and scandal.

Why did we care about this for “Mad Money” (other than for multidisciplinary programming on a stock show with an intellectual and historical punch)? Because we thought there was another wrongful French prisoner in the mix: Total SA, Europe’s third largest oil company and the largest company by market cap listed on the French market. The stock was down 7 percent (with a market cap loss of over $7 billion) on Tuesday after the news of a gas condensate leak from a shut-in well on the Elgin Franklin field located in the UK, Central North Sea — operated by Total with seven partners, including ENI and BG Group. Looking at the share price reaction and initial details of the spill, we thought that the investors’ choice to shoot first and ask questions later was equivalent to a “guilty until proven innocent” reaction to the stock that would ultimately lead to upside.

However, more uncertainty and negative headlines overnight caused us to switch this view and hold off on the segment. It is true that the majority of analysts are defending the stock as a buy after the spill highlighting that this is not a Macondo event. They cite everything from gas condensate vs oil, water depth, better prep, UK regulations vs US, and flow.

But ultimately, this analysis is futile. As we learned from the BP spill two years ago, Total will be trading on headlines right now — most of them which will be negative and highlighting risks and environmental impact. With this sort of event, valuation is frankly negligible in the near to medium-term. Plus, we still do not know the overall impact and how many costs or legal liabilities Total could incur — yet another question mark. At BP, the shares dropped from $60 in April 2010 to below $30 in June 2010 before rebounding to some degree.

The bottom line: With macro overhangs like this one, it’s messy to come in at these levels. The sell-off could be overdone, but the downside pressure on the stock could persist as uncertainty looms and negative headlines continue.

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