"Offshore Oil Strike" Board Game

This "Offshore Oil Strike" board game looks amusing, better than my other favorite Junta.

One of the cards says "Blow-Out! Rig Damaged. Oil Slick Clean-Up costs. Pay $1,000,000."

Sold the British Petroleum (BP) Debt

I decided to get out of the British Petroleum (BP) debt that I'd bought earlier, which has rallied slightly since I bought it, although not to par.

Basically I was sick of seeing the gushing wellhead on every news channel at the gym. (The only place I am exposed to television.)

British Petroleum (BP) Bonds Have Bounced Back

The BP note that I have mentioned a couple times (the 1.55% Guaranteed Notes due 2011) traded as high as 96.767 today.

I think it has started to bounce back and will be trading at par once something more exciting starts to occupy the news cycle.

Rally

The rally is being met by an equity put call ratio during the last half hour of ~0.6. Not so bullish.

The BP note has gotten a bit cheaper, has just traded to yield 9%.

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.

Bought Some British Petroleum (BP) Notes

There is BP paper due August 2011 trading at 95 that yields 6%ish - about 550bps rich to Treasuries.

That is too steep. BP has hardly any debt - their debt/EBITDA ratio is less than one.

The debt is very well covered by the enterprise value. Doing some rough math, I think the total value of the fim (the enterprise value) is greater than the damages caused by all U.S. hurricanes combined.