CORRECT: BP WATCH: Stock Is Up, But Investors Still Worried

11th Jun 2010 20:46

(The BP WATCH story published at 3:32 p.m. EDT misstated the credit default swaps levels. A corrected version follows.) By Donna Kardos Yesalavich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--A recent bounce in the shares of BP PLC (BP, BP.LN), as well as a drop in the cost to insure its bonds, indicates the market's concerns about the oil giant may be easing a bit. Yet U.S.-based investors say they are still wary of having any exposure to the British company because of the uncertainty over its liabilities and its dividend. BP's shares in London climbed for a second-consecutive session Friday, rising 7.2%, and American depositary shares of the company were up 2.4% in recent trading. Options volume in BP seems to have calmed down a bit. Credit protection costs are also lower; it now costs $395,000 a year to insure $10 million in BP bonds for five years, down from Thursday's cost of $465,000, according to data provider Markit. The action comes as BP is considering deferring or reducing its second-quarter dividend to help quell the political uproar in the U.S., while the British government has come to the defense of the battered oil giant, talking up the economic value of BP on both sides of the Atlantic. Even with BP's ADSs up over the past two sessions, the stock is down 45% from its closing price April 20, the day the oil spill began. But some investors say no matter how low the stock goes, they don't want any part of it. "It's a hands-off deal right now," said Steve Stahler, president of wealth-management firm The Stahler Group. "We don't have any options right now that are positive options for investors. I don't think we want to be touching this." Still, a number of analysts contend that BP is in such a strong financial position that it can withstand many of the worst-scenario liability numbers being tossed around, and doesn't have a need to make any changes to its dividend. Among them is Bruce Lanni, a portfolio strategist at NCPI. "BP has the wherewithal to absorb this," Lanni said. Lanni noted that the majority of the costs related to the spill are likely to be spread over five to 10 years, with this year's total possibly around $4 billion to $5 billion. Because BP is responsible for 65%, Lanni pegs BP's potential costs this year at $2.6 billion to $3.3 billion, less than the $6 billion to $7 billion the company has in cash. BP also generates $5 billion to $6 billion in free cash flow a year. Nevertheless, Lanni said a dividend suspension or deferral could benefit BP by helping ease relations with the Obama administration, add to the company's cash cushion, and potentially mitigate the harshness of penalties. As for shareholders who depend on the dividend, Lanni said there's a "distinct possibility" that BP could provide investors a sort of "make-up dividend" at year's end. Such a move "takes care of the government administration and also protects their long-term shareholders," he said. Last year, BP accounted for around 12.6% of dividends paid by all U.K. companies, and it was "traditionally seen as a 'safe' long-term investment, building solidly in value and paying a robust and regular dividend," according to FairPensions, a U.K. charity for pension schemes and fund managers. Regarding the "bankruptcy" term that's been floating about over the past week, that is something investors shouldn't have any concern about, Lanni said. He noted that in an interview he had with BP Chief Executive Tony Hayward on Thursday, Hayward said such an action is not under consideration. Still, Dave Klein, senior research analyst at Credit Derivatives Research, which has been studying both the stock and credit-default swap action in BP, said, "At this point, I wouldn't call it a buying opportunity because there's so much uncertainty." That uncertainty prompted Sean Kraus, chief investment officer of CitizensTrust, to sell the BP bonds CitizensTrust had last month. "We just don't want to put our customers at the risk of that potential loss or liability," Kraus said. "That's something we didn't want to have any exposure to." Meanwhile, James Dailey, chief investment officer at TEAM Financial Asset Management, said he is watching BP's stock for signs of near-term trading opportunities. However, even when his models do provide those indications, Dailey is afraid of buying the stock. Instead, he's looking at potential call options. "It's certainly attractive to short-term traders," he said. "But we haven't bought it yet. You have to have a lot of courage to buy that and we haven't worked up that courage quite yet." Dailey said he is looking at calls that would expire in July rather than June, with June expiration only a week away. He added, "I don't want to have the gun to my head with expiration next week." -By Donna Kardos Yesalavich, Dow Jones Newswires; 212-416-2188; [email protected] (END) Dow Jones Newswires June 11, 2010 15:46 ET (19:46 GMT)