BP: crisis play?

Thursday, Jun 03 2010 by marben100

I have created this thread as a distinct place to discuss the merits (or otherwise) of the investment case for BP, in the light of the oil spill, so that the Transocean semi fire thread can be kept "purer" for discussion of technical matters relating to the accident.

This thread can be used for reporting news and discussion relating to BP (LON:BP.) as an investment.

My own basis for investing in BP during the crisis is that I did not feel it likely that the dividend would be severely impacted. Not for the first time, some analysts are suggesting that the dividend COULD be under threat today. Clearly there is a risk but the numbers do not currenty suggest to me that it is excessively high. A reasonably conservative view is that the total cost of this crisis: well repair, spill clean up, compensation, penalties etc could be in the $20-$30bn range - spread over, maybe, 5 years. That is the sort of figure that BP could absorb without a huge financial impact, given its cashflow.

Of course, there is a risk/probability that BP's US operations & revenue generation in the future could also be impacted... but if so, this could impact the earnings of other operators who also will have to bear higher regulatory/insurance costs. The end result could easily be a higher oil price which would counterbalance the cost impact.

Filed Under: Crisis, Gulf Of Mexico,

Disclaimer:

The author may hold shares in this company, all opinions are his own and you should check any statements that appear factual and not rely on them before making an investment decision. The author is NOT a qualified analyst nor authorised to give investment advice. Whilst the author is a director of ShareSoc, all views expressed are entirely his own and not necessarily those of ShareSoc.

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BP p.l.c. (BP) is an integrated oil and gas company. The Company provides its customers with fuel for transportation, energy for heat and light, lubricants and the petrochemicals products used to make everyday items as diverse as paints, clothes and packaging. It operates in two business segments: Exploration and Production, and Refining and Marketing. Its Exploration and Production segment is responsible for its activities in oil and natural gas exploration, field development and production; midstream transportation, storage and processing, and the marketing and trading of natural gas, including liquefied natural gas, together with power and natural gas liquids. Its Refining and Marketing segment is responsible for the refining, manufacturing, marketing, transportation, and supply and trading of crude oil, petroleum, petrochemicals products and related services to wholesale and retail customers. The segment comprises three main businesses: fuels, lubricants and petrochemicals. more »

Share Price (Full)

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P/E (fwd)

8.3

Yield (fwd)

5.1

Mkt Cap (£m)

91,234

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685 Posts on this Thread show/hide all

	marben100	3rd Jun '10	1 of 685
Fitch has this morning downgraded BP's credit rating: http://blogs.wsj.com/marketbeat/2010/06/03/fitch-downgrades-bp/ Ratings agency Fitch downgraded BP’s long-term senior unsecured credit rating to double-A from double-A-plus 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....
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3rd Jun '10

1 of 685

Fitch has this morning downgraded BP's credit rating: http://blogs.wsj.com/marketbeat/2010/06/03/fitch-downgrades-bp/

Ratings agency Fitch downgraded BP’s long-term senior unsecured credit rating to double-A from double-A-plus 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....

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	SW10Chap	3rd Jun '10	2 of 685	2
A reasonably conservative view is that the total cost of this crisis: well repair, spill clean up, compensation, penalties etc could be in the $20-$30bn range - spread over, maybe, 5 years. Has anyone got quick-and-easy access to BP (LON:BP.) numbers to do some maths? The explosion happened on 20 April, at which time Brent was at around $84/bbl. As I type, it is around $74/bbl - a price which I'd argue has next-to-nothing in it for the Deepwater Horizon excitement. Simplistically-speaking, $30bn over 5 years is $6bn a year. So, assuming that on the 20th of April the BOPs did what they were supposed to and/or no spark was encountered by the escape, a few people had their bottoms kicked and nothing more happened, my question is: By how much would the oil price have to have fallen from $84 for BP to suffer the same effect - that's to say, a reduction in revenues of $6bn/year? We could then consider varying the assumptions a little - perhaps assuming a cost of $10bn/year - or possibly less, assuming that justice ensures that the service companies and their insurance companies shoulder their respective burdens. SW10
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3rd Jun '10

2 of 685

A reasonably conservative view is that the total cost of this crisis: well repair, spill clean up, compensation, penalties etc could be in the $20-$30bn range - spread over, maybe, 5 years.

Has anyone got quick-and-easy access to BP (LON:BP.) numbers to do some maths?

The explosion happened on 20 April, at which time Brent was at around $84/bbl. As I type, it is around $74/bbl - a price which I'd argue has next-to-nothing in it for the Deepwater Horizon excitement.

Simplistically-speaking, $30bn over 5 years is $6bn a year.

So, assuming that on the 20th of April the BOPs did what they were supposed to and/or no spark was encountered by the escape, a few people had their bottoms kicked and nothing more happened, my question is:

By how much would the oil price have to have fallen from $84 for BP to suffer the same effect - that's to say, a reduction in revenues of $6bn/year?

We could then consider varying the assumptions a little - perhaps assuming a cost of $10bn/year - or possibly less, assuming that justice ensures that the service companies and their insurance companies shoulder their respective burdens.

SW10

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	marben100	3rd Jun '10	3 of 685	2
In reply to SW10Chap, post #2 Good questions, SW10 - I'm a little occupied with other matters to try to answer your questions properly. If it helps, however, are you familiar with BP's rules of thumb? These currently show a pre-tax annual operating profit sensitivity of +/- $430m per $1/bbl change in the Brent price; +/- $90m per $0.1/mscf Henry Hub price; and $950m per +/- $1/bbl of refining margin. Cheers, Mark
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3rd Jun '10

3 of 685

In reply to SW10Chap, post #2

Good questions, SW10 - I'm a little occupied with other matters to try to answer your questions properly. If it helps, however, are you familiar with BP's rules of thumb?

These currently show a pre-tax annual operating profit sensitivity of +/- $430m per $1/bbl change in the Brent price; +/- $90m per $0.1/mscf Henry Hub price; and $950m per +/- $1/bbl of refining margin.

Cheers,

Mark

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	marben100	3rd Jun '10	4 of 685	1
A more positive analyst view here: http://www.smartmoney.com/Investing/Stocks/amid-takeover-rumors-bp-investors-eye-dividend/ Beleaguered CEO Tony Hayward has reportedly indicated the company will sustain the 56 cents a share dividend, which now puts payments at 9.7% of the share price, the highest among the 19 major oil companies. In an interview with The Daily Telegraph published Tuesday, Hayward called such concerns “overstated.” A company spokesman declined to comment on takeover possibilities or the fate of the dividend. Collins Stewart analyst Gordon Gray said in a Tuesday note that a dividend cut appears unlikely for now because it would require "a theoretical cash outflow of close to $25 billion.” He added that costly legal claims against the company will “almost certainly be spread over a number of years.” "However, we expect any explicit BP comment on dividend security – including the 2Q dividend on July 27 – to attract considerable negative attention from both the U.S. press and government,” he says
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3rd Jun '10

4 of 685

A more positive analyst view here: http://www.smartmoney.com/Investing/Stocks/amid-takeover-rumors-bp-investors-eye-dividend/

Beleaguered CEO Tony Hayward has reportedly indicated the company will sustain the 56 cents a share dividend, which now puts payments at 9.7% of the share price, the highest among the 19 major oil companies. In an interview with The Daily Telegraph published Tuesday, Hayward called such concerns “overstated.” A company spokesman declined to comment on takeover possibilities or the fate of the dividend.

Collins Stewart analyst Gordon Gray said in a Tuesday note that a dividend cut appears unlikely for now because it would require "a theoretical cash outflow of close to $25 billion.” He added that costly legal claims against the company will “almost certainly be spread over a number of years.”

"However, we expect any explicit BP comment on dividend security – including the 2Q dividend on July 27 – to attract considerable negative attention from both the U.S. press and government,” he says

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