BL: BP Options Show 63% Collapse as Hayward Heads to Washington
By Brian Swint and Jeff Kearns
June 14 (Bloomberg) -- The fastest-growing bet on BP Plc in the U.S. stock-options market shows traders expect a 63 percent plunge in about a month as costs surge for its uncontrolled well spewing oil into the Gulf of Mexico.
Options to sell BP’s American depository receipts in July at $12.50 recorded the largest jump in open interest of any contract during the last two weeks, soaring to 33,445 outstanding from zero as the month began, according to data compiled by Trade Alert LLC. Investors buying the put options are wagering the shares will extend their drop from $33.97 and wipe out $140 billion from BP’s market value since April 20, when the Deepwater Horizon rig exploded.
BP Chief Executive Officer Tony Hayward is set to testify before Congress this week and Chairman Carl-Henric Svanberg will answer a summons to the White House as politicians demand BP stops its dividend and pays laid off oil-rig workers. The spill’s cost may reach $40 billion, bank Standard Chartered Plc estimated last week, triple the $12.5 billion price tag Sanford C. Bernstein & Co. projected on April 30.
“The government has a lynch mob mentality,” said Fadel Gheit at Oppenheimer & Co. in New York, rated by StarMine as the most accurate active analyst on BP. “It’s in nobody’s interest to bankrupt BP, but that’s what Obama is doing right now. Crippling BP is not going to make them clean the spill better.”
Obama wants BP to set up an escrow account to pay claims, an aide said yesterday, and the Coast Guard gave BP an ultimatum until today to find more capacity to contain the leak. The company is currently collecting about 15,000 barrels a day through a cap on the damaged well. Government scientists raised their estimates for the pace of the spill to between 20,000 and 40,000 barrels a day last week, double earlier figures.
Cameron Call
In a phone call this weekend, Obama told British Prime Minister David Cameron he wasn’t trying to undermine BP’s value, U.K. Foreign Secretary William Hague said in an interview with the British Broadcasting Corp.
BP shares touched a 13-year low last week in London as the administration stepped up the rhetoric on BP, the largest U.S. oil producer. President Barack Obama said he would have fired Hayward, 53, if he were working for him. In the U.S., where the majority of options trading in the company’s shares occurs, the volume of put contracts changing hands last week was 100 times the level before the accident.
“People are still concerned that BP could go bankrupt,” said Chris Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago. “The puts are saying that people have such a high level of fear. There’s just a huge amount of put buying right now.”
Hurt Investors
BP’s ADRs closed at $33.97 in New York last week, down 44 percent from April 20. Sheila Williams, a spokesman for the company in London, declined to comment on trading in the shares.
Cameron’s phone call to Obama took place as concern mounted that the crisis at the U.K.’s largest non-financial company will hurt investors. BP paid 14 percent of the total dividends from the London stock market’s largest companies last year, according to Morgan Stanley.
BP has so far spent more than $1.4 billion trying to stop the spill and cleaning up crude that’s reached the coastline in northwest Florida. A cost of $40 billion would be more than double BP’s expected profit this year. A permanent solution to capping the Macondo well a mile below the Gulf of Mexico must wait for the completion of relief wells, expected in August at the earliest.
Credit default swaps for BP, contracts linked to the likelihood of the company failing to make debt repayments, soared to a record last week. The cost to protect $10 million of BP debt for a year reached $695,000, according to CMA DataVision. It was $29,000 on April 30.
‘Cashflow Long’
“Market speculation can hurt the company because it sends a signal that it’s in trouble,” Alastair Syme, an analyst at Nomura Holdings Inc. in London. “BP might find it difficult to access cheap credit today. But they don’t rely on credit for their day-to-day business. They are cashflow long and have great assets.”
More likely than default is BP will cut or defer its $10 billion-a-year dividend payments to appease politicians demanding it sets money aside to pay spill costs. Hayward said last week the company was “considering all options” for the second-quarter dividend. BP’s board will meet today to discuss the dividend, a spokesman said during the weekend.
Dividend swaps trading in the over-the-counter market imply a cut of about 50 percent over the next year, according to Bhavin Patel, an equity derivatives strategist at Royal Bank of Scotland Group Plc in London. BP’s December 2011 dividend swaps traded at 18 pence on June 11, he said, compared with a total payout of 36.42 pence in 2009.
Oil Fields
Most equity analysts in London and New York remain positive on BP, pointing to the company’s ability to generate cash from oil and gas fields worldwide. BP has 27 buy recommendations, 12 holds and one sell, according to analysts surveyed by Bloomberg.
BP’s leaders will have to last through their week in Washington. Svanberg, 58, is scheduled to meet Obama on June 16, and Hayward testifies to Congress the following day.
“The political rhetoric is certainly heating up,” said Jason Gammel, an analyst at Macquarie Securities USA Inc. “We need a discussion of how this is going to be fixed and not all the finger pointing. I hope that’s the endgame.”
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net.
Last Updated: June 13, 2010 19:01 EDT
