BP (ADR)

[Myth465]

I dont think BP has raised safety. They didnt after Texas City, and have a horrible record. The worst out of any major. That doesnt go away overnight and wont go away due to a spill. Its a cultural thing and people have to know their jobs are on the line if they do unsafe things.

 

 

---  This really brings it all home for me and sums up the situation.

 

As one of my colleagues remarked: “His company’s just scattered oil over the most litigious country on earth, the world’s most powerful man is breathing down his neck, and that call sounded all business as usual”.

 

 

[SharperDingaan]

 

BP has a cultural 'hubris' problem, that pretty much runs from the top down; were they in Capital Markets we'd be calling them GS. Interestingly they're both facing criminal probes, & have not been able to see their actions for what they really are.

 

The world needs oil/gasoline, but it doesn't have to come from BP. BP gasoline sold through an Exxon station works just as well, but the refining profit goes to Exxon & not BP.

 

Similarly a oil/gas lease doesn't have to be owned by BP. US leases can be retroactively re-assigned, & European/Mid-East leases can be acquired via takeover (Shell).

 

SD

 

[accutronman]

T2 Partners has taken a 4% interest in BP:

 

Hedge fund manager Whitney Tilson said that he is long BP (NYSE: BP) shares, saying that the stock is "just too cheap" at this point. He said that this is not a short term position for his firm, T2 Partners, and he fully expects for the BP headlines to be terrible for some time to come. He said that his long BP position amounts to only about 4% of his portfolio, which is a smaller percentage than many of his other holdings.

 

Tilson said that he does not expect for BP's dividend to be cut, citing the fact that such a development would be detrimental to U.K. pensioners and retirees. He said he did not think that either the U.S. or U.K governments will take the step of forcing the company to cut the dividend at the expense of shareholders. The hedge fund manager said that BP is one of the most profitable companies in the world, and that while the oil spill was inexcusable, he thinks that the price of BP is very compelling at current levels.

 

[Myth465]

I cant say I am surprised by Tilson. He seems to be a scan the headlines kind of guy. I think he will make money though off this one, but not prior to alot of pain. 1 or 2 of the EPA fines is by the barrel. I believe the negative headlines will keep coming even when the well is plugged. We will have one about the flow rate and 1 relating to the safety violations.

 

http://www.examiner.com/x-21743-New-Orleans-Progressive-Examiner~y2010m6d8-Scientists-from-the-Flow-Rate-Technical-Group-dispute-BPs-oil-containment-claims

 

Additionally, Leifer says, there is a possibility  that the ruptured oil well may be spewing what BP has called its worst-case scenario; as much as 100,000 barrels a day from a freely flowing pipe.

 

http://www.pressherald.com/news/nationworld/bp-ignored-safety-policies-across-north-america_2010-06-08.html

 

The confidential inquiries, which have not previously been made public, focused on a rash of problems at BP's Alaska oil-drilling operations. They described instances in which management flouted safety by neglecting aging equipment, pressured employees not to report problems and cut short or delayed inspections to reduce production costs.

[Cardboard]

This situation could take years to get resolved creating a huge overhang on the stock. All the bad news may be priced in already, but you will not know until the final lawsuit has settled in court. Think of something like big tobacco or asbestos.

 

IMO, it is worth paying a bit more for a producer not exposed to that disaster. It is also worth considering that this "risk" was not priced in properly before which should have a longer term impact on valuations. Production costs will also go up for additional safety to be built in the equipment, longer studies required before permitting. Growth and reserves could also be affected: takes more time, some areas become untouchable.

 

Longer term consumers will pay the bill. So oil could go up enough to offset higher costs and lost production. However, you have to be sure your producer is still alive to benefit when that happens.

 

By the way, Norway despite having already safer regulations is now not issuing anymore certain offshore drilling permits. The British could also follow soon.

 

http://af.reuters.com/article/energyOilNews/idAFLDE6571SP20100608

 

Cardboard

[Myth465]

This situation could take years to get resolved creating a huge overhang on the stock. All the bad news may be priced in already, but you will not know until the final lawsuit has settled in court. Think of something like big tobacco or asbestos.

 

IMO, it is worth paying a bit more for a producer not exposed to that disaster. It is also worth considering that this "risk" was not priced in properly before which should have a longer term impact on valuations. Production costs will also go up for additional safety to be built in the equipment, longer studies required before permitting. Growth and reserves could also be affected: takes more time, some areas become untouchable.

 

Longer term consumers will pay the bill. So oil could go up enough to offset higher costs and lost production. However, you have to be sure your producer is still alive to benefit when that happens.

 

By the way, Norway despite having already safer regulations is now not issuing anymore certain offshore drilling permits. The British could also follow soon.

 

http://af.reuters.com/article/energyOilNews/idAFLDE6571SP20100608

 

Cardboard

 

Thanks for the link Cardboard, now this is a cause for concern for the drilling sector. The gulf is one thing but if the rest of the world follows than. ..

[Myth465]

I wish I was a short seller. BP was pounded today. Down 18%. I was talking to a friend who worked their over the weekend who put a good chunk of 401k money into them, because of the balance sheet. He too thought they wouldnt cut the div. If they are down this far without the cut then what happens with it.  

 

This is the best analysis I have seen to date regarding BP.

 

http://seekingalpha.com/article/209166-bp-spill-size-estimates-keep-growing-along-with-potential-costs?source=hp_wc

 

There is now official recognition of the existence of vast submerged clouds of deep sea oil droplets ("plumes"). The existence of these were denied just ten days ago by BP CEO Tony Hayward. An article by Justin Gillis, Campbell Robertson and John Broder in The New York Times points out that there has not been an official connection of these dispersed oil clouds to the Deepwater Horizon well head. But no one has suggested any other source, either.

 

http://money.cnn.com/2010/06/09/news/companies/simmons_gulf_oil_spill.fortune/

 

Simmons calls for a zero.

 

What do you think is in store for the future of BP?

 

They have about a month before they declare Chapter 11. They're going to run out of cash from lawsuits, cleanup and other expenses. One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup. But there isn't enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this my guess is that they'll panic and go into Chapter 11.

 

-----

 

Anadarko is interesting as well, they dont have deep pockets and may be on the hook as well.

 

The interesting thing about the articles is I dont think you will see take overs without some sort of limit on the liability. Why would another company want a piece of this with so many known unknowns. Size of leak, plumes of oil, long term impact on the US's second best seafood source, criminal charges....

[beerbaron]

One thing is for sure, if someone were to invest in BP they should invest trough LEAPS. I believe it's a perfect case of "If by 2012 they are not out of business then they will be worth a lot more then the current price". It looks a lot like Greenbalt in "you can be a stock market Genius"

 

BeerBaron

[SharperDingaan]

 

Tilson is actually doing the right thing, so long as he's rolling into a position & hedging each tier as he goes. (1) 20% now to lock in the existing drop (2) 30% on a div cut/asset seizure (3) 40% on media coverage of the spill following a hurricane (4) 25% (10% balance+15% hedge gain) to ongoing foulups.

 

The worst case assumption is a sale to Shell (assumed) subject to a liability cap provided by the UK government (effectively a TARP type emergency measure to protect UK pensions). If BP actually survives, the investment will end up looking like WEBs Coke & will be talked about for years.

 

SD

 

 

[Ballinvarosig Investors]

Tilson is an ass.

 

Firstly, even the oil "experts" can't seem to agree on how bad this will be for BP, so I doubt Whitney has any extraordinary insights that they don't have. Secondly, why would you risk your capital on an open-ended liability when there are stocks out there that have been similarly decapitated (HAWK, ESV, etc), but without the risk of being sued into bankruptcy.

 

Right now, getting into BP is a pure speculative play.

[SharperDingaan]

 

The key words are "hedging each tier as he goes".

 

If BP goes to zero he'll have a realized loss on his long position, offset with a realized gain on his hedge; net loss of zero. The capital is not at risk, & he'll earn a very high yield if the div holds up. He can also hold for a very long time if he doesn't have a ALM mismatch.

 

SD 

[Myth465]

What I found interesting was your comment about the potential Career aspects of this move. Its fairly brilliant, especially if hedged. If wrong he says he was hedged and got 1 or 2 divs (everyone would forget the call in a few weeks) and if he turns out to be right he gets a similar legacy to Buffett and Coke. He would have to put 25% of his fund into it though, which wouldnt make sense because Coke had a confirmed liability, BP doesnt.

 

Interesting stuff. Somehow I dont think Tilson is hedged though.

[bookie71]

Read how good their oil spill plan was:

http://www.adn.com/2010/06/09/1315823/bp-c-plan.html

Chuck

[Ballinvarosig Investors]

 

Tilson is actually doing the right thing, so long as he's rolling into a position & hedging each tier as he goes. (1) 20% now to lock in the existing drop (2) 30% on a div cut/asset seizure (3) 40% on media coverage of the spill following a hurricane (4) 25% (10% balance+15% hedge gain) to ongoing foulups.

 

The worst case assumption is a sale to Shell (assumed) subject to a liability cap provided by the UK government (effectively a TARP type emergency measure to protect UK pensions). If BP actually survives, the investment will end up looking like WEBs Coke & will be talked about for years.

 

SD

Please excuse my ignorance if I'm wrong, but I haven't heard a thing about Tilson hedging his position. I only read the headline where he spoke of a 4% long position in BP (which he says he's increased since then). If you could direct me to where he's spoken of his hedging, I'd be grateful.

 

Secondly, I don't think this could possibly be compared to Warren's Coke investment. Back in 1988, Coke was still a leading beverages brand that had fallen out of favour with Wall Street (look at the cash flows of KO even when it was supposedly "lagging" Pepsi - http://www.fwallstreet.com/postimages/24-1988-ko.pdf), rather than being subject to a substantial impairment.

 

For the record, Goldman Sachs have come out with a liability of $130 billion - http://news.firedoglake.com/2010/06/11/bps-total-liability-80-billion-and-counting/

[Myth465]

Auctually I meant Amex, they had a confirmed liability. I think this is closer to Amex and salad oil than Coke. Coke was just a no brainier.

Also the article in that video is shocking, again why would anyone want exposure to this? As you can see Rig was mentioned as well. Buy the baby, and leave the bathwater.

[nomore]

Read how good their oil spill plan was:

http://www.adn.com/2010/06/09/1315823/bp-c-plan.html

Chuck

Check out this clip on BP: http://whereiszemoola.blogspot.com/2010/06/bp-spill-revelead.html  :D

[Eric50]

Interesting comments from Ken Peak, CEO of Contango Oil (he is one of my favorite CEO):

 

“The question on many minds these days is the impact of the Gulf of Mexico oil spill on the industry and in our case, Contango specifically. Obviously no one knows, but I will venture an opinion since it goes to the core of our business model and future. I am certain we will face increased regulatory and permitting costs and scrutiny. I believe we can deal with these challenges. I am certain we will face an increased emphasis on safety, and in particular, redundancy in “fail safes”. I welcome these new standards, but believe everything we are currently doing already meets a very high threshold of safety adherence. Hopefully, it is recognized and understood that no human endeavor is ever, and can never be made to be, absolutely, totally and flawlessly 100% fail safe.

 

“There are two areas that give me great concern. The first is the concept of unlimited environmental liability for a spill, or a limit so high that a debt-free company with an approximate $1.0 billion market cap like Contango is in essence, asked to “bet the Company” every time we drill a well. The move in recent days by some in Congress to retroactively change the law regarding environmental liability does not give me great confidence in our government. Nor do comments about “boots on throats”. The second area that causes great concern is the thought of going to jail for a judgment error or equipment failure – especially if the MMS approved the procedures that were being followed."

 

http://www.contango.com/investor/news/pr202_061010.pdf

[SharperDingaan]

Notable is that BP is now talking about suspending their dividend.

 

Loss estimates have already topped 5B, and BP is now talking about (temporarily) suspending 3 dividends & essentially paying for the spill out of cash-flow. But how reliable can the BP estimate really be? - if they don’t know how much is gushing, when it will stop, what the recovery effort will look like, & there is conclusive evidence of BP continually trying to ‘spin’ numbers? Most would suggest the proposed dividend suspension is really an attempt to cap liability, & forestall further action.

 

Putting assets into a trust means the administration chooses the assets, the assets are free of any debt obligations, & they will be borrowed against/sold to pay for cleanup. The administration would turn to US advisors (Exxon?) for advice on the asset selection; but if 40% of your (best) assets were suddenly put into trust, & your debt remained the same, wouldn’t you just be left with riskier assets & a debt/equity ratio & carry-costs that suddenly sky-rocket (reflecting the additional risk)? Most would suggest that BPs ‘strong BS argument’ is simply more ‘spin’ – they would actually NEED the div cut.

 

It’s highly unlikely that recent media coverage on what happens after the ‘clean-up ’ (Exxon Valdez) is accidental. It would seem that the administration has seen BP’s litigation ‘push-back’  & shareholder ‘hostage’ (1/3 are US) threats as red flags, the CEO as ‘tone deaf/politically incompetent’, & that next week’s meeting will be tell – not discuss. You have to wonder how long until the entire recovery is put into government hands, & sufficient assets seized to ensure that the bill will actually be paid.

 

The reality is that deep water drilling IS a bet-the-company proposition. You buy insurance to cover against a blow-out, you invest in the highest safety possible to minimize the premiums, & you farm out the opportunity among many parties – so that an accidental blow out will not kill you. If the drill was successful you buy out your partners interests. BP choose to ‘self-insure’ & lost; why should it not cost them the company – as they are NOT ‘special’.

 

Next week should be interesting.

 

SD

 

[Myth465]

The only thing that can save them is the relationship between Obama and David Cameron. Notice that they are trying to get BP to pay for everything. Literally everything. They were talking about having BP pay for the offshore workers who cant work due to the Moratorium (some 150,000 workers). Then backed away. Now they want to reverse engineer a river and want BP to pick up the tab. Call me crazy, but that cash flow really gets used up with projects like these. Anyone who doesnt think the feds can spent BPs cash, hasnt been watching government in action.

 

They will bleed BPs cashflow for years for this or will simply take the assets if people get pissed off enough. Americans dont love corporations that much to let this one go. I agree that People are silly or have no idea what they are getting into when they talk about BPs strong BS. Its oil millions of gallon of oil, floating in the water, and literally attacking one of America's coast. A coast that provides 40% of America's seafood and thousands if not millions of jobs across the impacted states. Every drop of news over the last few weeks has been negative. I dont think BP will get a break, even when they are actually capturing oil its negative because people figure out that the flow rate claims were too low.

 

We have the difficulties with the relief wells, hurricane season, then various stages of the spill. The stock will drop when it moves deeper into the marshes, hits Florida beaches, gets into the gulf stream, hurricanes begin to spawn, dividend is cut, or when Tony Hayward opens his mouth. The time to buy if there is a time to buy is after all that comes out and we have a basic idea of the flow rate and costs per barrel. Then its a basic calculation and you have a picture of the balance sheet because you will ahve the potential liability charges.

 

I agree, that offshore deep water drilling always will be a bet the company type of prospect. I respect Ken Peaks but think he is too close to this. Imagine if a Nuclear company CEO said he didnt want 1 reactor to be a bet the company type of deal and wanted a cap of liability. The existing cap is far too low, but goes out the door with criminal liability which I think is fair.

[username]

That might be a little off topic:

I'm really not familiar with the oil industry. in such cases, does a company like BP have the ability to deal with the spill, on their own. or  do some companies benefit from services and materials they provide to BP?

[woodstove]

Here's an interesting suggestion for stopping the flow of Deepwater Horizon well.

 

http://arxiv.org/abs/1006.0656

 

[T-bone1]

that is pretty much exactly what the "relieve wells" will do. These aren't really wells (in the sense that they won't extract oil), they will pump heavy mud into the formation at the bottom of the existing well, and the oil will push the mud up the riser towards the seafloor until the pressure equalizes due to the weight of the mud. Then they will pump in cement and start fighting back against the US gov't

[tiddman]

Here is a research report from Citi.  The money quote:

 

Our target price of $52.05 assumes a $40 billion value loss from the Macondo spillage and potential fall out.

 

T

 

[nomore]

Did you guys see Matthew Simons comments on Bloomberg?

 

It's highlighted on ZH: http://www.zerohedge.com/article/matt-simmons-revises-leak-estimate-120000-barrels-day-believes-oil-covers-40-gulf-beneath-su

[Myth465]

Thats the scariest thing I have seen all week. If he is right, I can see deep water drilling be banned.

I like Matt Simmons, but hope he is dead wrong. I wonder how Obama's speech goes.