The next time Barack Obama
places heavy emphasis on the first word in British Petroleum
or another American politician boasts about having his “boot on the
neck of British Petroleum” just remember it’s your pension that’s
taking a kicking.
This is not just a
problem for City fat cats or a big bad oil company everyone loves to
hate. BP paid £6.6bn in dividends last year – equal to £1 in every £7
paid out by all the companies in the FTSE 100 – and remains a major
holding in most income-hungry pension funds.
That seemed a
reasonable strategy while returns on cash deposits were negligible but
BP’s share price has now plunged by 33 per cent since the disaster in
the Gulf of Mexico. It stood at 646p in April but traded around 433p
today.
Independent statisticians Bloomberg list household name
fund managers including BlackRock, Legal & General, Barclays,
M&G, Scottish Widows, Threadneedle and AXA among major shareholders
in BP. Some may have bought since the share price began to slide but
most are sitting on massive losses.
You could even argue that
BP’s survival – and the beleaguered giant is now being talked of as a
takeover target – is vital to the British Government’s plans to cut
budget deficits and balance its books. BP paid £5bn tax in 2009 and
£10bn tax the year before when oil prices were higher.
At the
most microscopic end of this macro economic disaster, I had better
declare an interest here; like hundreds of thousands of small
investors, I hold BP shares and hope to continue doing so.
Nobody
should belittle the scale of the disaster in the Gulf of Mexico. 11
workers died when the Deepwater Horizon rig exploded, incalculable
environmental damage has been done to more than 70 miles of Louisiana’s
coastline and tens of thousands of people’s livelihoods have been
threatened.
No wonder nearly 250,000 people appear to have joined
a Facebook
group called “Boycott BP” and American politicians including
Interior Secretary Ken Salazar seem to be competing to see who can
vilify the oil giant in the most lurid language.
Now the latest
bad news from America is that CBS
News and the Washington Post are reporting that the government may be
preparing to prosecute BP, alleging criminal negligence. BP denies
it took any safety shortcuts – despite the shameful history of its
Texas City refinery explosion in which 15 workers died – and insists
it is doing everything possible to put things right in the Gulf of
Mexico.
But the American government and media seem to have
decided the oil company put profits above safety in its list of
priorities. Nor is there any reason to suppose British politicians and
journalists would behave any differently if it was an American company
that suffered similar setbacks here.
Or is there? When the Piper
Alpha rig exploded in the North Sea in July, 1988, no fewer than
167 workers died and environmental damage pushed insured losses to
£1.7bn. It was the worst offshore oil disaster in the world at that time
and feelings ran high in Aberdeen, where many families suffered
bereavement and financial loss.
But I do not recall Margaret
Thatcher seeking to make political capital out of that tragedy by using
inflammatory language about having her boot on the throat of
Occidental Petroleum, the American oil giant which operated Piper
Alpha. Oxy, as it was known because of the Los Angeles-based company’s
New York Stock Exchange ticker, did not become the target of any
government-sponsored hate campaigns in Britain.
By coincidence, I
happened to be in Aberdeen at the time of the Piper Alpha tragedy and
remember an uncle who worked on the rigs pointing out that drilling for
oil deep below the sea is a dangerous business. Perhaps intelligent
American politicians and journalists ought to remember that fact.
Finally,
Robert Preston of the BBC asks, Will
BP be forced out of the US?:
There's another
£13bn off BP's market value today, taking the cumulative loss
since the company sprung its hideous leak to well over £40bn.
Given
that BP is a core holding of most British pension funds, that's tens
of billions of pounds off the wealth of millions of British people
saving for a pension.
And with BP dividends representing around
8% of all income going into those pension funds (and a considerably
higher proportion of all corporate dividends received by those funds),
if BP's oil spill in the Gulf of Mexico causes collateral damage to its
dividend-paying capacity, well, many of us will be feeling a bit
poorer.
As
I've written here before, it's certainly not ludicrous to assume
that the final cost for BP of this mess could wipe out at least an
entire year's profit (which for the past three years was just over £13bn
on average) - once compensation and possible fines have been paid.
Perhaps more damagingly, the debacle is
doing considerable harm to the value of its brand in the US - with what
looks like every US citizen, from President Obama down, equating BP
with the sullying of one of America's most cherished coastlines.
The
talk among BP oil executives is that the company's reputation in the
US may have been so tarnished that the board will conclude that an
orderly withdrawal from America - with the sale of its massive US assets
- may be necessary (it's widely thought, for example, that Chevron
would be an enthusiastic buyer of those assets).
Were that exit
to occur, it would represent one of the great corporate humiliations of
all time, a reversal of those mega-bids of Amoco and Arco by BP - when
under the sway of Lord Browne - which transformed a division-two
British player into one of the global giants only a decade or so ago.
And what of Lord Browne's successor as chief exec, Tony Hayward?
It would be challenging to identify any specific decision or lapse
by him as the cause of what is now seen as the worst oil spill in US
history.
But some argue that BP was slow in recognising the
gravity of the debacle after the explosion in April.
And then
there's the boringly obvious point that angry shareholders, angry Gulf
coast fisherman and angry US citizens have a very human need to blame
someone - and if not the BP boss, then who?
It's difficult to
see how Mr Hayward's tenure at BP can extend beyond his immediate
management of this remarkable crisis.
I'm not
sure what to make out of the precipitous slide in BP's share price. There is
no doubt in my mind that some big hedge funds are making a killing on
BP's CDS, and stand to make even more if they're loading up at these
levels and BP shares snap back.
But for British pension
funds, this BP oil disaster is a financial disaster. They're going
to have a tougher time making up for these losses, and it will take time
to repair the damage they sustained.
Yes, he is treated horribly. People have resorted to some very unfair ad hominem-type attacks that have nothing to do with the subject matter in question.
We can disagree, let's just keep it factual.
Check and see if there are any muni bond ETF's with option chains. This bunch trades by appointment (i.e. no liquidity) so their are no option chains. But there may be some out there:
http://us.ishares.com/topics/fixed_income.htm?c=JAC01&utm_campaign=Yahoo!Paid&utm_medium=cpc&utm_source=Yahoo!&utm_term=high_yield_bond_etf
Just do some homework and also assess if that is really where you want your money to be. It's never to late to change your portfolio if you fear you have made a bad move.
As for Leo, click on contributors, and check any of his posts. He takes a real beating for his bullishness.
BP, Beyond Petroleum, headed to oblivion.
what about "BP - Beyond petroleum" = oblivion.
They crossed the Rubicon some time ago.
BP = Busted Pipe.
Is it possible that one dog in this world of moron hazard will actually be put down?
Word on the street is receivership for BP. It makes sense since the damages simply cannot be measured and it's time to shore (no pun intended) up the assets if they can't meet the liabilities. The EPA alone could fine them $10 billion. Royalties are another matter completely. Civil and criminal charges another. Clean-up, even more. Pensions? Dividends? Too bad. Welcome to Citi of the oil patch.
As we well know, the above stated damage possibilites are the reason BP has been trying to hide the amount that is being erupted. The activity they are doing now could also increase the oil volcano by 20% and since they have zip comfort in it being effective and are just doing it for show IMO, August is our first chance of hope, barring a miracle. Lest we forget, the relief well chances of hitting the target 1st time out are akin to winning the lottery, thus the reason for 2 being drilled at the same time. We will be lucky if either of these work. It's a very difficult operation getting precisely under the gusher and the reason the administration ordered them to drill two simultaneously.
Furthermore, the likes of APC, DO, RIG, etc, are crashing for good reason. When the 5 months are up (from the 6 mo ban a month ago), whaddayabet the ban on drilling in the Gulf gets extended? I give it 80%.
By then, the Gulf has the possibility of being beyond a catastrophic environmental nightmare if a hurricane hits. I think the odds are high that the ban will be continued since the bear is back and oil will be going down with the market due to a lack of global demand. No rose colored glasses here, per usual.
And anyone that sees a correlation between the Nov Elections and the drilling ban is underestimating just how angry this country is now, let alone the fury by August. Katrina happened and it was a terrible event, is still being rebuilt, particularly in the 9th ward and poorer areas.
But this BP nightmare is an ongoing Prime Time series that will not end until there is nothing further spewing from that well. It will not be downplayed in the press as more and more shots from Nasa are displayed for our viewing pleasure that show the enormous damage already done and even worse, that which we cannot see. BP denies there are 22 miles long and 6 mile deep plumes. Pure fallacy they say. Tony Hayward also stated that the clean up workers aren't feeling well because they may have food poisoning--it couldn't possibly be due to being exposed to toxic oil and gas fumes. Perhaps he needs to suck on a tailpipe in his garage and put us out of his misery.
And if one more moron calls this a spill in the MSM I will be hanging my head out the window and getting people even angrier. It's not a spill...it's a gushing well from hell.
Edit...I just opened my fortune cookie from dinner tonight: Discontent is the first step in the progress of a man or a nation. :)
Yeah, BP is widely held. But why worry about one stock in a portfolio? Paging Harry Markowitz. We should be more worried about the too-connected-to-fail losers on the CDS trades.
Amen, brother. Equities are risk assets, but what surprises me is how surprised everyone acts when the downside risk materializes.
If portfolio theory holds true over time, then unexpected losses should be offset with unexpected gains. Unless, as you suggest, the state sticks its beak in and starts picking winners (the big guys) and losers (everyone else). In that case, Markowitz is out the window, as surely his theory assumes an un-manipulated market.