Monday, July 26, 2010

"Anadarko, BP Lead Energy Bonds in Biggest Gains: Credit Markets" (BP; APC)

"BP Bonds Ooze Value" and "BP Bankruptcy Filing Would not Trigger Cross-default of Bonds" (BP)
More on BP's Bonds (BP)
"Short Sellers Use Bond Market To Bet Against BP And Anadarko" (BP; APC)
...However this case is a good illustration of something else:  the Dunning-Kruger effect.*  To wit:

When people are incompetent in the strategies they adopt to achieve success and satisfaction, they suffer a dual burden: Not only do they reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the ability to realize it.
Errol Morris writing at the New York Times has a piece well worth reading exploring this effect, including an interview with David Dunning....MORE
That was from "BP: "Incompetence, uncertainty and risk" (among securities analysts)" but it seems to fit the short-sellers too.
Here's the headline story, from Bloomberg:
Energy bonds are leading corporate debt returns this month after BP Plc sealed a well that had been spewing oil into the Gulf of Mexico and investors wagered on higher demand for petroleum in the global economic recovery.

Anadarko Petroleum Corp. notes rallied 10.3 percent and BP gained 7.3 percent, the two top performers driving a 1.45 percent advance for energy bonds, more than double the 0.64 percent for the broader market, according to Bank of America Merrill Lynch index data. Energy bonds returned 0.99 percent in June, trailing the 1.32 percent for corporate debt worldwide.

BP, whose top executive is discussing his departure from the company, plans to permanently plug the well with cement next month, potentially capping its final liability for the accident at $33 billion, according to analysts. Investors are shifting their attention from the biggest oil spill in U.S. history to the need for energy as global gross domestic product is forecast to grow 3.7 percent this year, according to Citigroup Inc.
“I looked at BP and said this is a great opportunity, it’s really suited to a high-risk portfolio,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management in Salem, Massachusetts. “There’s a whole spectrum of different energy companies which are crucial to the economy now that event risk is priced into the market place.”

Anadarko Bonds
Larkin holds the bonds of energy companies including The Woodlands, Texas-based Anadarko, which owns 25 percent of the Gulf well, and Hess Corp. of New York. He declined to say whether he’s buying BP debt.
The extra yield investors demand to hold BP’s bonds instead of benchmark government securities fell to 390 basis points as of July 23, after soaring 507 basis points to 547 in the two months following the April 20 explosion on the Deepwater Horizon rig, according to Bank of America Merrill Lynch’s Global Corporates, Energy index. Anadarko bond spreads have narrowed to 447, after widening 370 basis points to 513....MORE