History has proven time and again that no good news, let alone good price action, can be the result of any company being mentioned in the same breath as one of the alphabet soup agencies headquartered in Washington, D.C. FBI, IRS, SEC, all equal bad news. Oil companies with ties to the Gulf of Mexico oil spill are learning this the hard way as several of these firms are now under investigation by the Justice Department (DoJ).
The problem with drawing the Justice Department's ire is that this particular agency can levy both civil and criminal charges. That is kind of a legal double whammy that can bludgeon a publicly traded company and that is exactly the scenario that played out on Tuesday. U.S. Attorney General Eric Holder announced that the Justice Department is considering civil and criminal charges against companies like BP, Halliburton (HAL) and Transocean.
Even companies with exposure to the Deepwater Horizon rig that could be considered ''passive'' are suffering mightily, stained in similar fashion to BP and Transocean. Transocean owned the rig and BP operated it with a 65% working interest. Anadarko Petroleum (APC), the second-largest U.S. independent oil and gas producer, merely held a 25% non-operating interest in the rig. That stock shed almost 20% on Tuesday and is trading less than $2 away from its 52-week low.
Japan-based Mitsui, owner of a 10% stake in the Deepwater Horizon, saw its Tokyo-listed shares fall to their lowest level in a year, dragged down by the company's European and U.S. peers. Japan Drilling fell to its lowest level in five months on the same news. Mistsui and Japan Drilling are companies many U.S. investors had probably not heard of prior to the Gulf spill. Fortunately for U.S. investors, these stocks are not listed on U.S. exchanges.
Speaking of foreign companies, BP and Transocean, Villains Number One and Two in this tragedy, were down 15% and 12%, respectively on Tuesday. The anecdotes are fun if you like stock market trivia. BP's plunge was the worst one-day drop for its U.S.-listed shares in 30 years and the worst one-day decline for the London-listed shares in 18 years. BP has lost $70 billion in market value since April 20. McDonald's (MCD) has a market cap of roughly $70 billion. According to the CIA World Factbook, $70 billion was Iraq's GDP in 2009.
Mercifully for those that are long U.S. stocks, BP and Transocean are not members of the S&P 500 because they are foreign companies. The S&P 500 closed around 1070 on Tuesday and it is safe to assume that close would have been 10 to 20 points lower if BP (BP) and Transocean (RIG) were members of the index.
There is probably an investing lesson laced with a catching falling knives metaphor wrapped up in all of this calamity and it may wise to heed that advice as it pertains to BP and some others. Sure, there are opportunities in the energy sector, but why rush in? The good buys may be even in cheaper in just a few days thanks to the Justice Department.