BP WATCH: Shares Up After Claims Acceleration, But Worries Remain

15th Jun 2010 18:11

By Donna Kardos Yesalavich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Shares of BP PLC (BP) turned higher in the U.S. Tuesday afternoon after the oil giant said it has approved initial payments toward 90% of commercial large loss claims that have been filed as a result of financial impacts from the Deepwater Horizon explosion and resulting spill. Investors saw the acceleration of the claims processing as a positive indication that BP is working to appease the U.S. government, which the market is hoping will ultimately help mitigate the harshness of the Obama administration's demands on the oil giant. The American depositary shares of BP were up 2.7% recently. But indications in other markets remained bearish. Investors are worrying over how the company's negotiations with the Obama administration could be affected by documents showing its engineers made cost-conscious decisions that ran counter to the advice of major contractors ahead of the Deepwater Horizon rig explosion. In the options market, volume was more elevated in puts, which convey the right to sell, than calls, which convey the right to buy. Meanwhile, the cost to insure BP's bonds rose from Monday and Friday. BP bond prices fell sharply across the board, and BP's shares closed nearly 4% lower in London. The market moves follow a congressional panel's Monday release of documents including internal company emails that showed costs were a primary concern in a series of decisions in the days leading up to the April 20 rig explosion. The documents accompanied a letter to BP chief executive Tony Hayward, who is scheduled to testify before Congress Thursday. "What they're suggesting is that BP made a series of decisions leading up to the accident where they prioritized cost and speed over risk containment. It's probably the clearest evidence we've had to date of BP's decision-making leading up to the accident," said Whitney Stanco, an energy policy analyst at Concept Capital's Washington Research Group. "It probably hurts what little bargaining or negotiating capacity BP had going into discussions with the White House about how to create an escrow account." Adding to investors' concerns, Fitch Ratings downgraded its long-term rating for BP to just above junk, citing significantly higher estimates for the size of the oil spill in the Gulf of Mexico and demands from U.S. authorities that the company pay a substantial amount of the expected cleanup and compensation costs up front. "There's a lot more oil spilling than was estimated a few weeks ago and you have the administration and Congress and everybody up in arms, and who knows what the ramifications are yet," said Maury Fertig, chief investment officer at Relative Value Partners. "And then you have the emails that were disclosed yesterday. Who knows where it all ends up." Fertig said it's possible that BP, which has lost nearly 40% of its market value since the explosion of the Deepwater Horizon rig, could turn out to be a great buy at its current price. But that's not a chance he's willing to take. "There's too much uncertainty for me," he said. "I've heard this story from clients who left their advisors because they had Lehman in their account or they had AIG in their account, whether it was 10,000 shares or 10 shares," Fertig said, adding that he doesn't want clients to leave him if BP shares suffer further. In addition, Fertig said with all the negative rhetoric surrounding BP, "whether it makes money or not, some people feel like they're dirty by owning it. I don't tend to think that way myself, but you don't need anything that's going to cause consternation or concern among your clients." Many investors who had been holding the stock largely for its dividend have also been selling because the future of its dividend is less certain, as BP is considering deferring or reducing its second-quarter dividend to help quell the political uproar in the U.S. Among them is Daniel Morgan, portfolio manager at Synovus Securities, who said his firm eliminated its exposure to BP last week from a portfolio focused on dividend income. "Once the concern came up that we were jeopardizing the dividend, that's really what sparked the change in terms of our position on the stock," he said. "If the dividend would have been safe, we would have rode it out." David Chalupnik, head of equities at First American Funds, said one of the funds his firm runs also was holding BP purely for its dividend. Last week, it cut that position in half as the uncertainty around the dividend rose. First American, however, increased its exposure last week to Anadarko Petroleum, which owns a 25% stake in the site of the Deepwater Horizon explosion and subsequent oil leak. "If you look at what's coming out, it seems there's a good chance that BP is negligent in the way they operated that well," Chalupnik said. "If that's the case, Anadarko would be a great way to play the spill," he added, noting the company's market capitalization has lost more than 30% in market capitalization since the explosion, "and it doesn't have all the liabilities associated with it that BP does." Shares of Anadarko were up 6.7% in recent Tuesday trading. -By Donna Kardos Yesalavich, Dow Jones Newswires; 212-416-2188; [email protected] (END) Dow Jones Newswires June 15, 2010 13:11 ET (17:11 GMT)