BP and irrationality

This has gone beyond sensible levels, with BP now being asked to pay theoretical costs like those relating to people not visiting Florida beaches which are clean because they might not have been and also the wages of oil workers at other companies who have been laid off because of the moratorium on deepwater drilling. The shares are off 16% overnight, prompting an RNS announcement by the company that it believes the share price move is unjustified by the financial state of the company. RNS stands for Regulatory News Service and is the stock market channel for officially mandated announcements, like this one (dramatic unjustified price action) or other reasons (e.g. someone buys 5% of the company).

This is worse: BN 8:50 *BP 5-YEAR DEFAULT SWAPS SOAR 208 BASIS POINTS TO 594, CMA
SAYS

The CDS (Credit Default Swap) price represents the price of insurance against insolvency of the company. This means the market thinks there is 6% of that now. Unfortunately I am forced to agree. The trade is no longer ‘will the reasonable costs of the cleanup be less than the share price decline?’ – that continues to be true with the latter number now around £49bn. But it is clear that costs way beyond ‘reasonable’ will be imposed because, remarkably, Obama is suffering on approval rating on this more than Bush did with Katrina.

Now I chose to take this risk, I can take the loss and that’s what markets are about. So if I get screwed, it’s no one else’s problem. I am also still confident that if the company survives, it will be worth 650p again in three years. But look at this:

barack-obama-s-attacks-on-bp-hurting-british-pensioners

Of course, the political asymmetry is that none of those people vote in the US. But maybe we need an ad campaign featuring suffering grannies. And maybe this gets diplomatic now. After all, it is hard to see what BP have done wrong here. We are still at the level of punishment being exacted on a no fault basis: if it is proved that BP were negligent in some way, this will kick off. But right now, as far as we know, they were engaged in a legal operation, they conducted it in accordance with regulatory standards, they have worked hard at fixing the problem by various means, it is admitted on all sides that what they are trying to do is unprecedentedly hard and they have paid a lot of compensation claims. What else do the Americans want?

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8 Responses to BP and irrationality

  1. timlshort says:

    Current share price 369p i.e. much worse than the number in the article.

    Also note that to the extent public sector pension funds are invested in BP stock, it’s my problem – or one for all taxpayers. Why are we holding that risk for postmen…?

  2. James Monk says:

    Even *I* think the US gov’t is being internally inconsistent if they think BP should pay *other oil companies* because they can no longer engage in deep-water drilling. All this was a bit predictable though – never waste a good crisis.

    Even the non-political costs are basically unforeseeable – this thing could plausibly keep gushing for the next 10 years. BP probably were negligent (it is usually the case in this sort of accident), but the gov’t is also culpable for having less regulation than, say, Norway. If I were Hayward I’d be going on TV and telling people how much money Obama accepted in donations and lobbying – try and throw some of the dirt back at him.

    Obama once said of Cameron “what a lightweight.” Perhaps there is an element of that, too. It’s a big enough annoyance to Britain that eventually our gov’t will do something.

  3. timlshort says:

    James –

    I agree. There is also this from April which isn’t helping.

    UPI: Obamas-brother-denied-re-entry-to-Britain

    Not sure what we should do. But since we are looking to save money, maybe we should just pull out of Iraq and Afghanistan immediately.

  4. James Monk says:

    Obama has loads of step-brothers, I believe. It’s statistically likely that one of them would get into trouble.

    I had the same thought about Afghaniraq, but I’m sure there are plenty of ways we can annoy the US if we need to. That’s without even involving the EU.

    • timlshort says:

      The seven years of illegal immigrant status is slightly more of a concern than some bar story which may or may not be cooked up.

      It may be that we don’t actually want to annoy the US but just look as if we might. This is what the FCO did when it said it was worried that this might affect transatlantic relations.

      I don’t imagine they care militarily whether we are in Helmand or not because our force presence is so much smaller that theirs. We are just providing political cover.

      Intelligence sharing arrangements and NATO provide reasons to pause for thought.

  5. timlshort says:

    The way this will play out now is that the company is finished. The way to retain some shareholder value is as follows:

    1). Full dividend suspension for foreseeable future; either to conserve cash or if the former is not warranted by eventual cleanup costs, then just for political reasons. [Though perhaps the company should sue the US administration for unwarranted value destruction. That would definitely be a courageous decision though.] The div yield at these prices is 9% which represents the market view that it will not be paid.

    2). PR driven demerger of US assets (the former Arco and AMOCO) ideally not on a firesale basis with return to shareholders via spec div.

    3). The UK rump to be renamed, though note that in theory BP no longer stands for anything.

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