Why BP stock's run is over

After a nice climb in recent weeks, the oil giant is about to take another dive as optimism over the Gulf spill wanes.

By InvestorPlace Jul 19, 2010 9:44AM

By Hillary Kramer, Editor of Game Changers

BP (BP) seems to have stabilized. After shares spiked to nearly $40 late Thursday, they have settled back down around $38 -- up over 9% from a week ago and up almost 17% in the past month.

But it’s the end of the line for BP, and investors who made a gamble and jumped in during the worst of the Gulf oil spill should cash out their profits now and put those gains to work elsewhere. The fact is that BP shares are going to get toxic in a hurry.

I know, by selling BP now, I’m going against conventional wisdom. But I went against conventional wisdom when I recommended investors buy BP at $32 with a target of $37. Now that that target has been hit and we’ve seen a quick 16% profit, here are four clear reasons the oil giant is set for another spill in share prices:

The stock’s big run during the past week was fueled in part by hope over the newest effort to cap the broken well. Now that that has actually happened, the glow of that success will fade quickly as the focus returns to the massive cleanup effort. We’re already hearing about pressure causing seepage on the ocean floor, so it’s hard to believe the optimism of the cap will last.

The rumor mill is wrong. The stock’s rise is also due to rumors of a takeover or sale of some assets. It has also been rumored that BP is in talks to sell off parts of the business to help pay for Gulf cleanup. Reports also suggest that Exxon and perhaps Chevron plan to make a bid for BP. But I just don’t see that happening right now. There is far too much uncertainty over the company’s massive liability claims for a potential suitor to jump in now. (Related Article – Will Exxon Buy BP?)

Another round of hideous PR is on the way. The Presidential panel tasked with investigating the BP spill and subsequent cleanup started hearings this week, and they will continue for months. The PR will be terrible as the entire spill ordeal -- and BP’s handling of it -- will be dissected in front of the cameras.

Things are about to get ugly when it comes to claims against BP. There is a firestorm brewing over the way claims are being handled. Last week, the company reduced payments on 40,000 claims over incomplete paperwork and more than half of all claims haven’t yet been processed. Expect criticism to ratchet up in the weeks ahead.

At the time of this writing, Hilary Kramer did not own a position in BP stock. 

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