BP - off the hook ? ...and a BUY ?

sabretoothtigger

Debt Market Hammers BP, Partners For Second Day

By Katy Burne
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The cost of insuring debt issued by BP PLC (BP, BP.LN) and its partners in the Deepwater Horizon disaster jumped dramatically Wednesday, and the price of their bonds dropped as analysts began to estimate the cost of the accident, the worst oil spill in U.S. history.

At one point, parties selling insurance--in the form of credit default swaps--on nonpayment of debt issued by Transocean Inc. (RIG), which owned and operated the drilling rig on behalf of BP, were demanding extra payments at the outset of the insurance contracts. The phenomenon, called "trading upfront," is a rare event for an investment-grade company.

Declines in the debt markets were for the most part in contrast to the reaction of the stock market, suggesting bond investors, with their lower risk tolerance, have a dimmer view of how the disaster will affect BP and its partners. BP shares, for example, rose 3.1% even as risk premiums on its bonds were growing by as much as 1.7 percentage points. Risk premiums--the added return investors demand to own the bonds instead of super-safe Treasurys--move inversely to the value of the underlying credit.

"Where there is uncertainty ... and no clear-cut measure of how or when it could get resolved, investors head for the hills," said Susan Jansen, head of U.S. credit research at Nomura Securities International in New York. "Bond investors are looking back at long-term litigation scenarios they have seen for tobacco liability and asbestos, and understanding it may be years before they really understand what the final costs are."

Early reckonings of those costs from Credit Suisse and Tudor, Pickering, Holt & Co. Securities were not encouraging. Credit Suisse put the tally at $15 billion to $23 billion, not including a separate $14 billion of claims from the tourism industry and fisheries. Tudor Pickering put the tally even higher: $35 billion to $40 billion.

BP is on the hook for 65% of the damage, while the rest is split among its partners in the project: Anadarko Petroleum Corp. (APC) at 25% and Mitsui & Co. (MITSY, 8031.TO) at 10%. Transocean doesn't own a stake in the oil field, but it is likely to be a key part of any lawsuits.

"Transocean will certainly field a large number of lawsuits and will incur significant legal fees over a number of years to come, but should ultimately be cleared of clean-up and related economic damage liability," said Brian Gibbons, senior oil and gas analyst at CreditSights in New York. "There is massive uncertainty that will remain an overhang on the stock and bonds for some time to come. Credit investors don't have the risk tolerance to wait this out."

The risk premium, or spread, on BP Capital Markets' 5.255% bonds due in 2013 was quoted at 447 basis points--4.47 percentage points over comparable Treasurys--which was 1.97 percentage points wider than Tuesday. The spread on Anadarko's 7.625% bonds due 2014 were quoted at 4.87 percentage points, wider by 1.98 percentage points.

The spread on Transocean's 5.25% bonds due 2013 were quoted at 6.23 percentage points late Wednesday, according to MarketAxess; that was 1.93 percentage points wider than the day before.

Credit default swaps protecting the holder against non-payment on Transocean debt were quoted at 3.5 points, according to broker Phoenix Partners, before falling back to 465 basis points without any upfront fees. The price with upfront fees would have cost a protection buyer $500,000 per year over a five-year period to insure $10 million of Transocean debt, plus a one-time upfront payment of $350,000; the regular quoted price would cost $465,000 per year for $10 million notional of protection.

Transocean has invoked a 19th century law, the Shipowner's Limitation of Liability Act of 1851, in an effort to limit its liability to just under $27 million. The U.S. Justice Department on Tuesday told a federal court in Houston that the law should not apply to claims made by the U.S. government or the states.

At the same time, Attorney General Eric Holder said the Justice Department had opened civil and criminal investigations into the accident.

Despite all this, some analysts and others said they believed the reaction in the credit markets was exaggerated.

Jaimin Patel, a credit analyst at Societe Generale, said the volatility seen in oil and gas stocks associated with the disaster was directly tied to negative headlines, in the same way that the companies' positions improved when it first appeared that BP's so-called 'top kill' solution might work. "Today was something of a reversal of that," he said.

The companies involved, BP, Transocean, Anadarko, oil services provider Halliburton Co. (HAL), and to a lesser extent Cameron International Corp. (CAM), which made the blowout preventer, are all traditional, investment-grade names. So the reaction to Transocean in particular, a strong BBB name, was surprising.

-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=8epvslrSte8w70Oi0npgHw%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires

June 02, 2010 18:50 ET (22:50 GMT)

turbobob

According to market maker Evolution, BP is likely to suspend dividend payments for the rest of 2010..

http://www.moneyam.com/action/news/showArticle?id=3869624

sabretoothtigger

Thats no big deal because the share price drops by the amount of the dividend each time anyway and the reverse would apply in this case. On the bigger picture, barring a martial law situation bp represents reasonable value I think depending mostly on where you think oil prices will go

http://www.youtube.com/watch?v=UUk92huNQf8

Fitch Downgrades BP To AA from AA+; Outlook Is Negative
(Adds detail.)


By James Herron
Of DOW JONES NEWSWIRES

LONDON (Dow Jones)--Ratings agency Fitch downgraded BP PLC's (BP) long-term senior unsecured credit rating to AA from AA+ Thursday and placed the rating on watch negative as the company's liability for the oil spill in the Gulf of Mexico escalated into billions of dollars and it faced a criminal investigation.

"The downgrade of BP's ratings reflects Fitch's opinion that risks to both BP's business and financial profile continue to increase following the Deepwater Horizon accident in the U.S. Gulf of Mexico," the agency said in a statement. "The company has so far repeatedly failed to stop the resultant oil leak and has instead reverted to containment methods that are yet to be fully implemented and are subject to potential weather related disruption."

"An additional factor supporting the downgrade is the 1 June 2010 announcement by U.S. Attorney General, Eric Holder, that both a criminal and civil investigation has opened," Fitch said.

Credit markets shrugged off the downgrade, and the cost of insuring the company's bonds remained lower than Wednesday's close, according to CMAvision. Five-year BP credit default swaps are now at 228.9 basis points, from 259.0 basis points late Wednesday. This is still more than 170 basis points wider than its level at the start of May.

Fitch expects total cleanup costs for 2010 of between $2 billion and $3 billion, and BP may also face criminal and civil penalties on top of this, Fitch said. "BP is still facing substantial additional risks in relation to the oil spill," and its rating could be downgraded further on a number of factors, Fitch said.

If there is a permanent increase in the flow of oil from the damaged well--one risk in BP's current operation to cut through the leaking pipeline and install a device to collect the oil--there could be a negative impact on the rating, Fitch said. Another concern is that BP's last-ditch effort to halt the spill, drilling a relief well, might not be fully effective, it said.

Fitch acknowledged the strength of BP's balance sheet at the current high oil price and said further downgrades would most likely leave it within the AA category.

The oil spill in the Gulf of Mexico, which began following an April 20 explosion on the Deepwater Horizon drilling rig, is already the worst oil spill in U.S. history, but may continue for several more months after repeated failures to cap the leaking well.

At 0956 GMT BP shares were up 3.2%, or 14 pence, at 442 pence. Its shares have fallen by almost a third since April 20.

-By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317; james.herron@dowjones.com

(Michael Wilson contributed to this article.)

Click here to go to Dow Jones NewsPlus, a web front page of today's most important business and market news, analysis and commentary: http://www.djnewsplus.com/access/al?rnd=YlReZBpwGfYhEdSKqWAkzg%3D%3D. You can use this link on the day this article is published and the following day.

(END) Dow Jones Newswires

June 03, 2010 06:18 ET (10:18 GMT)

tradetime

sabretoothtigger wrote: »

Thats no big deal because the share price drops by the amount of the dividend each time anyway and the reverse would apply in this case. On the bigger picture, barring a martial law situation bp represents reasonable value I think depending mostly on where you think oil prices will go

http://www.youtube.com/watch?v=UUk92huNQf8

Agreed, suspension of the dividend makes more money available on the balance sheet, to the tune of approx $10 Billion p.a.

The bigger wild card for me is the current US administration and their likely actions based on how they have behaved towards the financial institutions of their own. To some extent BP represents a heaven sent opportunity to vent all their frustrations at not being able to punish the financial institutions to the satisfaction of the public. Here they have a foreign villain to make an example of with little home collateral damage.

sabretoothtigger

BP monitored pressure data from the failed blowout preventer during a previous, failed "top kill" operation, and determined that cutting off the pipe at the top of the LMRP would not have significant impact on the oil flow. Dispersants are being sprayed at the site during the capping operation.

* U.S. government scientists estimated the flow could temporarily increase by as much as 20 percent.

* The cap effort is, in theory, similar to a much larger 98-ton containment dome that was placed at the end of the broken pipe in early May. That dome also was connected to the ship by pipe and was intended to corral and channel oil and gas to the surface.

* In that effort, too much seawater got inside, mixed with natural gas at high pressure and cold temperatures, and formed ice-like hydrates that blocked oil from flowing up the pipe to the ship.

* The smaller cap and seal are designed to exclude seawater and avoid the hydrate problem. BP also aims to pump methanol down the pipe during the operation to keep the oil warm and combat possible hydrate formation.

BACKUP CAPS/DOMES

* If the first containment cap doesn't work, BP has several backup caps with and without seals of varying sizes at the seabed, on the way or being manufactured.

http://www.reuters.com/article/idAFN0324403620100603?rpc=44





29 dead dolphins and 227 dead sea turtles have been collected within the BP #oilspill area: http://www.nwf.org/News-and-Magazines/Media-Center/News-by-Topic/Wildlife/2010/06-01-10-Dolphin-and-turtle-deaths-are-only-tip-of-the-iceberg.aspx


The BP oil slick may spread to New York
http://www.nydailynews.com/news/national/2010/06/03/2010-06-03_bp_oil_slick_could_hit_east_coast_in_weeks__and_spread_to_new_york__beyond_gover.html

Praana

I can't help but thinking that people are missing the point , and that the real devastation is to the oceANS AND Marine life here!!! Ok fine people are going to make a quick buck or two out of every situation, but there's more than money at stake here!

ChiefGrasscutter

Praana wrote: »

I can't help but thinking that people are missing the point , and that the real devastation is to the oceANS AND Marine life here!!! Ok fine people are going to make a quick buck or two out of every situation, but there's more than money at stake here!

The amount of oil that is leaking here is 'relatively' small....compared that is to the sum total of the amount that is leaking all day, every day, all year, for umpteen years from defective undersea pipelines/joints in such lesser regulated oil producing areas of the world such as Nigeria.
The difference of course is that such leaks are out of sight and out of mind and, hey anyway it gives us cheap petrol: so no one gives a sh*t. Now that such a leak is happening on US's doorstep of course it is a totally different matter: everyone is outraged.

worldtraveller

For sale (maybe) -- oil giant with world-class assets, unquantified liabilities and a reputation for major mishaps.

That's what BP brings to the table as a merger target. The company, still worth about $120 billion, has been battered by fallout from the catastrophic oil spill in the Gulf of Mexico and analysts have started to speculate that the damage from the spill could end up making it impossible for BP to continue as a standalone company.

"Given the collapse in the share price and the potential for it to fall further we expect that it could become a takeover target -- particularly if its operating position in the U.S. becomes untenable," said Dougie Youngson, a London-based analyst at Arbuthnot Securities.

There are only a handful of companies that could entertain a merger with BP, and of course the company has not said it's for sale. Even if it were, a rival may want to wait until the spill is finally capped -- at which point BP's market capitalization could very well improve.

In any event, BP is clearly a weakened company compared with where it stood before the spill.

The obvious partner for BP would be Anglo-Dutch rival Royal Dutch Shell, though Total or Exxon Mobil can't be entirely ruled out either.

Merger rumors with Royal Dutch Shell have bubbled for years -- and ex-BP CEO John Browne said in his autobiography the companies quietly explored such a move in 2004.

According to Browne, the companies estimated a merger could generate savings of $9 billion a year in three to five years time. Tony Hayward's predecessor said BP missed the boat by not pursuing the deal.

Among BP's key assets are a joint venture in oil-rich Russia and its huge presence in the Gulf of Mexico -- a presence now under intense scrutiny. U.S. President Barack Obama imposed a six-month moratorium on new deepwater wells and the Justice Department is looking for possible criminal wrongdoing in events that led to the worst offshore spill in the nation's history.

BP's reputation in the U.S. was already battered because of the deadly explosion at a Texas City refinery as well as leaking pipelines on Alaska's North Slope.

Shell's problems have been more in the accounting realm, such as when it infamously overstated the value of its oil reserves at the beginning of the last decade.

It's also had a notably tougher time than BP in Russia, where Gazprom muscled away control of the Sakhalin II field. (BP also fought a bruising battle in Russia but still controls a 50% stake in TNK-BP.)

Shell also has been plagued by its presence in Nigeria, home to an active militia targeting pipelines crisscrossing the Niger River Delta.

Shell has a bigger presence in Canadian oil sands -- a presence that, thanks to BP, is looking better given the relative ease of excavating energy compared with drilling for it thousands of feet below the sea. Even the environmental consequences of oil sands -- long thought to be the worst form of petroleum production -- aren't looking quite as bad when compared with the Gulf of Mexico spill.

Shell also has, for better or worse, a larger gas exposure, including liquefied, natural gas or shale variety.

What both companies also have in common is next to no presence in OPEC countries, though they harbor a desire to bulk up on reserves in Iraq.

Iraq could well be a pipedream for both companies -- as could the idea of a BP-Shell merger.

MarketWatch

TRUSt_NO_1_2

BP has too many friends in high places (Obama being one of them)
The share price will be battered.But it's political bull5shit.
You cannot change laws retrospectively (well I suppose Zimbabwe etc can).They have limited liability...end of from what I can see.

Sure BP will pay whatever.But eventually,when all the upset people have been paid off..they will claim it all back ...quietly.

Think of it like a bank bail out.Taxpayers pick up the bill.

The share price will continue to get battered..probably sub £3.
Then it will quadruple in short time.

amcluesent

I'm starting to think BP is being sabotaged by place-men working from the inside. After all, every explosion and failure has been in the USA, despite its reams and reams of safety regs. But they don't want another oil-major taking business...the number of combined failures on the Gulf rig are too much for coincidence.