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Value for the brave in BP bonds?

Some investors are now starting to see value in the company’s debt.

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by James Phillipps on Jun 16, 2010 at 13:36

Investors in BP’s bonds have been badly beaten up this week with president Obama’s constant attacks on the Gulf of Mexico oil spill coupled with the Fitch downgrade sending prices into freefall.

With the clean up costs seemingly edging up by the day and the potential for expense litigation dogging the company for year, it is little wonder that investors have been fleeing for the exit.

Fitch slashed BP’s credit rating by six notches yesterday, downgrading it from AA to BBB and its debt is now effectively trading at junk levels.

The cost of insuring BP debt soared by over 20% on the news and it now costs $515,000 a year to cover $10 million of debt, up from $424,000 at the close of Monday.

The extent of the spread widening on BP’s bonds has been similarly dramatic. BP’s 1.55% coupon bond maturing in 2011 were initially launched at a spread of 50 basis points over US Treasuries, but the yield moved up as high as 8.76% yesterday. Yields on the most actively traded bond, the 5.25% coupon 2013 issue have risen to 7.66%.

Although it will be a roller-coaster ride in the short-term, some investors are now finding value in these bonds. The bet really is whether BP will go bust or not.

Colin Peterson, an analyst at Credit Bubble Stocks, says: ‘I think best contrarian play are the 1.55% guaranteed notes due in 2011. The notes are issued by BP Capital Markets but fully guaranteed by the parent company. I suspect these will bounce back to par as soon as the spill is out of the headlines.’

If the obvious downside risk is that BP goes bust, just how likely is this?
Brokers Simmons & Company has just bucked the trend by upgrading BP from neutral to overweight.

Analyst Robert Kessler admits a lot of risks remain but he believes that bankruptcy is unlikely.

He points out that BP’s pre-Macondo (the oil well in the Gulf of Mexico) liquidation value is in the range of $130-$192 billion, which is well above Kessler’s net Macondo liability range of $18-90 billion. If these liabilities are spread out over a decade, the risk-reward balance is even more attractive.

‘For perspective, BP shares are 26% cheaper than when oil prices bottomed at £10 a barrel on 10 December, 1998 and roughly equivalent in terms of market capitalisation,’ he says. ‘Meanwhile the company’s book value of $104 billion in Q1 2010 is 96% higher than 1998 levels and reserves are up 30%.’

At $75 a barrel, BP generates $17 billion a year in free cash flow, before $10 billion dividend payouts (which may or may not be suspended) are factored in. By comparison, the current rate of spend at Macondo is equivalent to $11 billion a year.

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9 comments so far. Why not have your say?

How is it that no-one writes about the now infamous rig and its actual operators, Transocean, an US company domiciled in Swiizerland. Its employees were manning its Deepwater Horizon rig that exploded killing eleven of its workers. It is planning to pay its investors a $billion dividend. What a charmed life US companies enjoy. Remember Bhopal - a name that never seems to have passed the President's lips. Does anyone believe that if a US company operating in the North Sea with a British company and staff were to have a disaster, it would pay all costs and exonerate the Brits? Is there any hope that the President's analysis of blame would be regarded as a precedent for US companies operating all over the world?

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Further to Bernard's comments and still in the US company oil disasters, there was Piper Alpha in the North Sea with 167 dead British workers on board, with Health & Safety standards abominally lax. Transocean's Deepwater Horizon rig was receiving their second Gulf wide safety award when it blew - does the US oil company infrastucture carryout in depth safety checks or just take it on spec that the Blow Out Preventers will work?

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I totally agree with Bernard,we should do all for the US that they did after Bhopal. Also, what about the Piper Alpha North Sea rig which blew up with enormous loss of life. I guess the problem is the rednecks, to whom Obama is seeking to appeal, have never heard of Bhopal, Piper Alpha, or even the North Sea. They are not too hot on 'ejucashun'!

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I agree, you can tell messrs Cameron and Hague that they can forget my vote next time round if they don't get off their backsides and read the riot act to that yankee shower. It might get us nowhere but at least it would put the balance straight and lower my blood pressure at least.

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Agree with all of the above with exception of an elder one's comment regards withdrawing vote for Cameron & Hague - don't want Brown back at any price!! The Yanks think they own the f***ing world and their president shaping up to be pretty mediocre.

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Brown's done for and his lot should have learnt their lesson by now, and I make my remark as a life-time tory; it seems to me that whoever gets into power we progressively lose our sovereignty nonetheless; but then I'm an old man and seen better days by either interpretation no doubt.

A thought besides occurs, if the American Company TransOcean are so much responsible for this hiatus can we not up the ante and have BP seek to sue them for negligence if that is possible.

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I seem to remember the histories of Fanny Mae and Freddie Mac causing a turmoil in the world markets, with critical effects on all Financial markets resulting in many financial establishments coming to grief.

This was a far greater effect than small oil deposits being left on Louisiana beaches.

I don't seem remember the Fed being ordered to make huge financial deposits for the use of those effected by the ''accidental'' collapse of these two institutions.

Maybe Obama would like to consider what rectification action the US Government is prepared to offer in compensation, or is his disastrous lack of real government likely to continue.

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Wake up Obama and learn that the USA must play the game by international rules.

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an elder one

Jun 16, 2010 at 20:46

I read somewhere of the possibility of there being copious oil under Afganistan, I wonder if the Chinese are waiting for the Yanks to bugger off so they can get to it; they are sure have to half a million or so spare troops to keep order there and lots of cash to set about it; perhaps they might employ BP - just a weird notion!

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