Sunday, June 27, 2010

Why you should go long BP - carefully

The Deepwater Horizon tragedy has been a fiasco. BP will owe billions and will continue to pay materially and in creditibility for many years. But despite all of this, BP will still exist when the noise dies down.

1) Energy security depends on it

BP owns well developed and yet to be developed strategic oil interests all over the world. BP owns interests in Azerbaijian, Angola, Brazil, and Norway. BP has also strategic rights to potential deepwater sites that could hold vast fortunes of oil resources. In bankruptcy, foreign governments may lose faith in US and Britain organization may lose these assets to major competitors from China and Russia. This is much more threatening to the administration than even the clean up effort.

2) BP is as much an American company as it is British

The current form of BP is the result of a merger between legacy BP, and Aramco, the legacy Standard Oil, in 1998, and a purchaser of ARCO, the Atlantic Richfield Co. in 2000, another major American oil producer, and Burmah Oil, PLC. The resulting company is the largest oil producer in the world. But the legacy of the company makes over 40% of the existing shareholders attributable to the Standard Oil and ARCO firms, and thus American interests. Moreover, over 23,000 of 80,000 BP employees are in the US.

So often in the debate about BP there has been accusations that the US government should punish foreign interests for their irresponsibility. Instead, the history of the firm points to a long history of American shareholder interest in BP. The US government has no interest in penalizing the firm to the detriment of US shareholders unless absolutely necessary

What to do?

Although the US government has had blistering criticism and threats to the BP organization, Bloomberg has reported that Obama said on June 16th "BP is a strong and viable company, and it is in all of our interests that it remains so." Thus if the US government has no interest in bankrupting the company through punitive measures, then someone needs to tell that to the bond market. BP bonds are selling at a 10%+ discount to previous prices. This offers a significant opportunity to the prudent speculator. Bill Gross, the founder of PIMCO, has already taken the leap and currently owns millions of subordinated issues.

Long BP Senior Debt "E" Series and Long BP Subordinated Debt


Conscience Palate said...

In my opinion, you didn’t talk about the main reason that BP is going bankrupt; the biggest bill in the history of the world. Precedent has been set. Yes BPs court costs are going to be astronomical, but that will be dealing with the fringe; there’s not going to be any argument for 90% of the claims against them.
And toward your point about vast deepwater sites. Deepwater sites are just like the many reserves around the world that are largely untapped because it is prohibitively expensive to pull oil from them; and OPEC will keep them prohibitively expensive. With the massive operations around deepwater drilling, and the added regulations that they are going to see around the world, it’ll be hard to compete with those who stick a straw down into the sand and cap it. And, I’m not sure that other big oil will come to the rescue because their balance sheets are struggling too much to fork up some cash for assets that won’t be paying out for as long as OPEC doesn’t want them paying out. I may be proven wrong about that last point though.

Lockstep said...

So far so good.

When I hear about the "biggest bill in the world" claims I refer back to the tobacco lawsuits against Phillip Morris that blamed them for thousands of deaths and false advertising, etc. Even when found guilty, the Phillip Morris corporation was able to tie up the verdict in court for another decade. The actual payouts did not come until at least a decade after the verdict and then did not have an overwhelming impact on the health of the firm because of the massive profits accumulated during that time.

BP currently makes $20B in profit a year, on a good year. Thus a $20B fine is not material to their overall financial health. Even residual claims will be muted.

There is plenty of risk that something goes wrong with what I have just outlined. But stay long BP, but don't go big on this one.

Lockstep said...

Now that the hole is closed and there are no apparent leaks, BP just has to worry about the lawsuits.

This investment is doing very well and I will hold until maturity.

Lockstep said...

At the time of purchase, BP "E" series debt was selling at 95 cents on the USD. Now it is selling at $1.03 with a 5.65% yield to maturity.

Still holding.


BP is a company I can do without.