BP WATCH: BP's Shares Slide To Fresh 14-Year Lows

25th Jun 2010 19:17

By Donna Kardos Yesalavich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--BP PLC's (BP) shares tumbled to fresh 14-year lows in the U.S. and London on Friday as concerns grew that the company might have to consider selling shares to bolster confidence in its financial stability. A sale of shares, suggested by a Nomura research note to clients, would dilute a stock that is already down 55% since April 20, when the Deepwater Horizon rig exploded. The oil giant is already seeking to sell as much as $10 billion in assets and has been lining up additional loans. But Nomura's analysts said a sale of shares, perhaps backed by sovereign wealth, "could prove the attractive short-term solution" to investors' weakening confidence in BP's financial state. "A heavy inversion of both credit yield and equity volatility suggests the market is concerned about a near-term credit event around BP," Nomura noted, adding, "we see equity dilution as countered by the benefits of financial solidity." Investors appeared to think otherwise Friday, as dilution fears gave the market another reason to sell BP. Its American depositary shares were recently down 5.5% to $27.18, its fifth straight session in the red. The stock hit an intraday low Friday of $27.07, a level BP hasn't closed below since July 1, 1996. The London shares closed 6.5% lower but had been down as much as 9%. The slide has wiped out more than $100 billion of market value, leaving BP with a market cap of about $85.8 billion. Still, Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, said an equity offering could encourage investors about BP if it is structured in a way that prevents it from being immediately dilutive to current shareholders, such as with preferred shares being issued that would later convert to common shares. "It could prove more beneficial than dilutive," LeBas said, adding that if dilution isn't expected to happen until a later conversion date, it could make an equity offering "perceived quite positively." Bond yields for BP's outstanding debt securities rose significantly Friday, and in the options market, the volume of put contracts, which convey the right to sell, was particularly elevated. The credit default swaps market is now pricing in a greater risk of BP defaulting in one year than over five years. BP's credit-default swaps are now at 725 basis points, up from 630 basis points at the start of the week, according to Markit. "That doesn't speak well to their ability to issue new debt," LeBas said. "At a minimum, it would be extraordinarily expensive for them to issue." LeBas said he views investing in BP's bonds similar to the idea of catching a falling knife. "If you can do it well, you can do it, but it's a little too risky for my blood," he said. "The risk stems from market volatility more than fundamental credit risk. But as we saw in the 2008-to-2009 time frame, negative sentiment can ultimately sink a company. For BP, that negative sentiment would have to be around for a very long time, but it could theoretically happen." At the same time, investors are getting jittery over the approaching hurricane season and how storms could impact BP's efforts to collect oil from the well and cap it. On Friday, the National Hurricane Center forecast rising seas and winds in the Gulf of Mexico because of "a wind surge associated with a tropical wave" moving into the Gulf later in the day. With the concerns about dilution and weather in the Gulf, "there's just so much bad news," said Craig Hodges, president of Hodges Capital Management. He noted the market was already particularly worried by the uncertainty over potential liabilities for the oil spill, with BP on Friday saying it has spent $2.35 billion to date related to the oil spill. "Any time you get a story like that and the stock hits a 14-year low, anybody that's in the stock is going to say 'I want out,'" Hodges said. "That's what you're seeing today, people throwing up their hands who were hoping for the negative news to subside." -By Donna Kardos Yesalavich, Dow Jones Newswires; 212-416-2188; [email protected] (END) Dow Jones Newswires June 25, 2010 14:17 ET (18:17 GMT)