Oil Co. Outlook: Who’s the Biggest Loser?
When it comes to investment performance, BP would appear to be the biggest loser. And plenty of investors are looking at the company’s competitors as potential big winners.
But just as the submarine cloud of oil is spreading death across the Gulf of Mexico, BP’s financial damage is wafting across many other companies.
Part of the damage is just general disfavor toward the refining and energy sectors, not to mention the drag that will undoubtedly come from an inevitable increase in regulation and all-around scrutiny. (This year’s oil company regulatory filings probably won’t include anything like Chesapeake Energy’s payment of $12 million to buy the chairman’s antique map collection.)
While BP is putting together its $20 billion cleanup fund, it may also seek to recoup claims from related parties such as Transocean and Halliburton. The exact mechanism for allocating costs could turn out to be the damages version of Russian Roulette.
Business Insider notes the uncertainty: “Remember, the courts haven’t decided who is to blame for this disaster. The cost of cleanup, claims, and penalties may be shared many ways.”
While it’s easy to see the impact of disaster cost on the equity of those involved, debt markets are also affected. (Not coincidentally, BP’s Fitch debt rating plummeted to BBB earlier this month, and the company is wading into bank and possibly high yield markets to borrow as much as $15 billion on top of undrawn credit lines of $10.5 billion.)
In the world of debt, financial pressures have mounted in the oil business, according to a Business Insider piece entitled “25 Energy Companies Whose Default Odds Have Surged Since Deepwater.”
Members of the 25 range from Chevron and Shell at the low end, while big cumulative probability of default numbers go to Anadarko Petroleum (47.1%), Transocean (41.1%), BP (30.8%), and Pride International (30.5%).
Undoubtedly, investors are reckoning the odds on shorting some stocks and buying some distressed debt in the oil business, but the legal and economic vagaries of the situation make the Russian Roulette comparison all too real at the moment—and for all of us, not just investors.
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