BP Investors Overreacting to Oil Spill: Analyst

Investors are overreacting to the effects that the Deepwater Horizon oil spill will have on BP's share value, sending the company's stock down more than half of its true value, a JPMorgan analyst said Tuesday.

Crisis in the Gulf
Crisis in the Gulf

With a nearly 40 percent plunge in the stock, investors are pricing in a 50 percent dividend cut at the Europe-based energy company that is unlikely to happen, analyst Fred Lucas said. JPMorgan has an "overweight" rating on the stock.

"BP's share price has almost reached parity with its net book value per share and it is trading at a 55% discount to our sum-of-the-parts value," Lucas wrote in a note to clients. "We have never recorded such a universal set of extremely depressed fundamental metrics. What facts are we missing?"

According to the analyst's calculations, BP has lost $37 billion in relative equity market value since the April 20 spill into the Gulf of Mexico. That dwarfs the estimated cost of $5 billion. Lucas said it is hard to imagine that ensuing costs of litigation and damages could make up the remaining $32 billion.

"We continue to view this event as a one-off that does not materially change the long term underlying earnings power of BP," he wrote. "Clearly, the market is now thinking differently."

A dividend cut, Lucas said, would be inconsistent with BP's policies and unlikely from such an event.

He also said that despite the waves of bad publicity that surround the largely futile efforts so far in stopping the leak, BP has been able to skim 321,000 barrels of oily liquid from the surface and is ahead of schedule on relief well efforts.

"At times like this, we can but encourage investors to say in touch with the facts, however negative sentiment has become," Lucas wrote.

BP's shares haven't been the only in the sector to take a hit from the spill.

Options players were targeting Schlumberger on Tuesday, making bets that the oil services company's price would fall nearly 10 percent by July.

The move comes as congressional investigators requested documents from Schlumberger in an effort to determine the company's involvement with the spill.

"This news is weighing heavily on the stock along with Thursday's announcement by President Obama that there is to be a six-month moratorium on new offshore drilling permits," Interactive Brokers analyst Caitlin Duffy said. "Bearish options players flooded the July contract with pessimism, selling call options and buying puts."

The options contracts focused on the July $50 strike target, with put buyers making money if the stock would lose 9.75 percent of its value, a drop to $47.56. Call sellers made moves that would pay as long as Schlumberger doesn't go higher than $57.25 by expiration.