Those recently popular trades to hedge BP dividends using options to create synthetic BP stock may prove prescient. The WSJ is reporting that the firm is now "considering cutting or deferring its second quarter dividend." The dividend is due to be announced on July 27, and BP’s board may cut it altogether, defer it, or pay all or part in scrip, effectively an IOU to investors, Hayward was quoted as saying." The news comes as Reuters announces that the daily flow rate from the spill is actually double previous estimates: "News that the flow rate may be as high 40,000 barrels (1.68 million gallons/6.36 million liters) per day -- twice as much as previously thought -- came after the U.S. market closed on Thursday." This is very bad news as it effectively doubles any accrued fines that the firm will ultimately have to pay: the new liability estimate now may be as high as $80 billion! And true to form, an administration official is there to pour some more fuel in the fire: "White House adviser David Axelrod dismissed complaints from BP about the U.S. government’s pressure, saying in an interview Hayward should “spend less time on hyperbole, and a lot more time on trying to solve the problem,” according to the Journal." In other news, in a research note released yesterday, Goldman's analyst della Vigna expressed a muted enthusiasm for the stock, nothing compared to JPM rabid support for BP stock at these levels.
BP shares have fallen 12% this week, due to increased pressure on management from the US administration, however no material negative news came through in terms of the size or potential cost of the GoM spill. Additionally the riser cap is in place and appears to be capturing a significant amount of oil. BP shares have now fallen 42% since the accident, underperforming European integrated oils by 23%. This implies that the market is discounting c.US$33 bn of post-tax damages from the spill, equivalent to US$40-50 bn on a pre-tax basis, which is in the upper end of our estimated liability range. Given uncertainties remain, we still see superior risk/reward in Shell and Statoil, both Conviction Buy.
In our note BP: Incorporating potential GoM damages; down to Neutral published on June 7, 2010 we highlighted a conservative mid-case scenario of US$36 bn of damages, with a reasonable worst-case scenario of US$60-70 bn. On our estimates, BP shares now have as much upside potential as the rest of the European integrated oil sector (33%), assuming US$70 bn of damages and a 10% discount to the rest of the sector on EV/DACF, which suggests that the risk/reward is now tilted to the upside. However, uncertainty over the level of damages and on potential funding problems if a material amount of these liabilities mature within the next 12-24 months lead us to keep a Neutral rating on the stock.
Key risks to our view and price target include a failure in the relief well, a deeper cut to the dividend than we currently forecast and materially loweroil prices.
The problem is that new oil spill estimates could have a huge negative impact on the company due to fines which are a function of the actual spill rate:
U.S. scientists said on Thursday that between 20,000 and 40,000 barrels per day (840,000 and 1.7 million gallons/3.2 million and 6.4 million liters) of oil flowed from the well before June 3, when BP's remotely operated robots sawed through an underwater pipe to clear the way for a capping procedure.
That is twice the level of previously estimated -- although many experts had predicted a sharp increase in the estimate.
U.S. Interior Secretary Ken Salazar told a congressional panel on Wednesday that the cut itself may have increased the rate by a further 4 to 5 percent.
"CRISIS JUST BEGINNING"
Based on a rate of 40,000 barrels per day, the stricken well could have spewed as much as 2 million barrels (84 million gallons/317 million of liters) of oil since it ruptured on April 20 -- eight times the amount that the Exxon Valdez spilled into Prince William Sound in Alaska in 1989.
BP says it has collected 73,324 barrels (3.1 million gallons/11.7 million liters) of oil since installing the capping system.
"The latest estimates confirm that the BP Deepwater spill is the worst environmental disaster in U.S. history. Even if BP were to shut off the flow today, this crisis is just beginning," said John Hocevar, the Oceans Campaign Director for Greenpeace USA.
The new estimates, in which BP had no input, could have huge financial implications.
"Any EPA (Environmental Protection Agency) fines would be on a per barrel basis, so the new numbers would not be good for any company held responsible," said one oil analyst based in New York who declined to be named.
Under the Clean Water Act, BP and others could be exposed to fines up to $4,300 for every barrel leaked into the gulf, according to legal experts and official documents.
All this leads back to the debate taken up previously by Dylan Ratigan: is BP now trully TBTF? If the company's CDS are any indication, which are 75 bps tighter today to just over 400 bps, this could very well become the prevalent opinion quite soon.