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Funds Place Bets on BP

Fidelity loads up, while others unload the oil firm in the wake of the Gulf spill.

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Investors have been divided over  BP's (BP) prospects after the April 20 Deepwater Horizon accident in the Gulf of Mexico. Has the disaster put the company's future in jeopardy, or has market overreaction created a unique opportunity to buy the oil giant at a discount?

At the Morningstar Conference last month, the general tone tilted toward caution, and several managers noted that they could not satisfactorily determine the extent to which BP's stock slide was justified. Daniel O'Keefe of  Artisan International Value Investor  (ARTKX), for instance, said he looked at BP because of the dramatic value destruction but hadn't purchased it because he could not evaluate the extent of the losses from the spill. Another value-minded manager, Philippe Brugere-Trelat of  Mutual Global Discovery  (TEDIX), said he dipped a toe into BP because the stock fell so substantially but that he has kept it to a very small position because he remains concerned about future fines, penalties, and unknowns.

Estimating costs requires making assumptions about several factors, including not only direct cleanup costs, but also civil penalties that will be determined through the court system during the next several years. Morningstar analyst Catharina Milostan predicts civil penalties could range broadly, from $4 billion to $46 billion. The extent to which BP will be able to contain the oil also remains unclear--a full solution is not expected until relief wells are completed in mid-August.

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Rachel Haig does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.