Still Like British Petroleum (BP) Debt

Two factors that people seem to be forgetting when thinking about British Petroleum (BP) equity and, especially, debt: how small the spill is relative to the size of the Gulf, and how big BP is relative to the damages caused and even the local economies of the coastal states.

Here's some much-needed perspective on the physical extent of the Gulf of Mexico oil spill: "the amount of oil released is 1/10,000,000,000 of the volume of the Gulf (one ten billionth)."

Meanwhile, here is a BP research report from energy investment bank Simmons & Company. They have upgraded BP shares from neutral to overweight, which is interesting since principal Matt Simmons has been pounding the table about spill severity.

The summary:

"we estimate that BP’s pre-Macondo liquidation value is in the range of $130 - $192 billion, well above our undiscounted net Macondo liability range of $18 – 91 billion, leaving a base case theoretical residual value of $38/adr if BP were to be immediately liquidated (not likely, in our view). When instead the Macondo liabilities are paid over 10+ years, the net present value of those liabilities is further reduced. Net of these discounted liabilities (10% discount rate, 10 years), BP shares are worth, by our estimates, $24-58/adr, offering an attractive risk reward balance"

Of course, if the shares are worth anything, the debt should be worth par.

I think the best contrarian play is the 1.55% Guaranteed Notes due 2011 [pdf] that I mentioned on Friday, and which are currently trading to yield 6%. The notes are issued by BP Capital Markets p.l.c. but fully guaranteed by the parent company.

I suspect these will bounce back to par as soon as the spill is out of the headlines.

I do predict that the spill will become the new all-purpose excuse for companies reporting bad second quarter earnings.