Tuesday, June 1, 2010

J.P. Morgan Comments on British Petroleum (BP)

From Notable Calls:

British Petroleum (NYSE:BP): Priced for the dividend to be cut in half...
J.P. Morgan is out commenting on British Petroleum (NYSE:BP) noting the stock capitulates on negative sentiment, but containment remedies continue.

BP share price capitulation - Today’s 14% share price fall takes the cumulative loss of BP’s equity market value to approximately $75bn since US market close on 20 April (the Macondo well tragedy occurred later that evening). This represents an absolute market value loss of 39%. If they adjust for the European oil & gas sector's interim weakness (-20%), BP’s relative loss of equity market value is approximately $37bn – an unprecedented loss of value arising from a single company specific event. JPM notes that this figure is more than 37x BP’s latest estimate of the cumulative costs ($990m, source BP 1 June - this includes the cost of spill response, containment, relief well drilling, commitments to the Gulf Coast States, settlements and federal costs). They also note that these costs ought to be shared by BP’s lease partners (Anadarko 25% and Mitsui 15%). On this basis, the relative loss of market value is thus closer to 58x BP's net cash exposure to date.

Struggle to rationalize BP’s extreme share price reaction - JPM says they had originally assumed a total containment cost of $7.2bn (100%, based on 120 days at $60m per day). So far, the costs have averaged $24m per day given 42 days since the tragic loss of well control occurred. BP’s 65% share of their original cost estimate is approximately $5bn including the cost of the two relief wells. The difference between this figure and the relative loss of market value ($37bn) is around $32bn. The firm struggles to believe that litigation settlements, claims payments and punitive damages will rise anywhere close to rationalize the difference ($32bn). However, if the market believes this figure, then it presumably also believes that such a large economic loss will enforce a dividend cut. Hence, the present 2010E measured dividend yield of 8.8% (based on 14 cents pcq in 2010E), is presumably somewhere closer to half that figure, in the market’s view....MORE