Posts Tagged ‘BP’

Did BP outsmart Obama?

In Uncategorized on 24/06/2010 at 7:09 am

The British were once known as “Perfidious Albion”. They had a reputation of being devious and tracherous

Could this still be true today? (Note that many Iranians and Arabs today still believe that anything bad that happens today, is the result of British trickery: talk about soft power.)

It may be anything but a “shakedown.”

The more likely truth is that the White House may have actually helped BP by obtaining the oil company’s agreement to a $20 billion damage claims fund for the enormous oil spill in the Gulf of Mexico. The final details of this fund are still being negotiated by BP and the White House. But if BP negotiates well, this fund may permit the company to better manage a Herculean litigation process and reduce its ultimate costs.

From initial reports, the only notable concessions on BP’s part were twofold. First, BP explicitly confirmed to the White House that it would not argue to apply the $75 million liability cap under the Oil Production Recovery Act of 1990. Second, BP agreed to pay $100 million to compensate rig workers who are unemployed by President Obama’s six-month moratorium on drilling in the gulf.

After a more informed look, though, neither of these appears to be a significant concession. As Prof. Noah Hall writes at the Great Lakes Water Blog, “The $75 million cap does not apply if the companies have violated any federal safety or operational regulation (and it’s very likely that at least one minor safety violation will be shown).” In addition, the cap does not apply to any claims brought under state law. BP is simply acknowledging the legal reality with its admission that this cap will not apply and its liability will be greater.

Second, as The Wall Street Journal reported Monday, BP bargained to limit its voluntary compensation of the oil rig workers to $100 million after the White House requested fuller compensation. This is a relatively small amount for BP. Furthermore, BP can also try to offset this amount against any criminal and civil fines that are ultimately imposed upon it or argue that its generosity should be taken into account in setting any such penalty. (Peter J. Henning discussed these penalties at White Collar Watch.)

Of course, there is still the matter of $20 billion in payments to the fund. Even in this case, BP may come out a winner.

BP has managed to spread the payments over three and a half years. This allows the company to manage its cash flow over the period and avoid a significant shock to its operations. BP also states that “[t]he fund will be available to satisfy legitimate claims including natural resource damages and state and local response costs.” This effectively covers all claims, which appear to be rapidly climbing into the billions of dollars. BP has thus merely moved money to pay claims that it would have to pay anyway, and the company will no doubt negotiate to allow it to use these funds quite broadly.

BP will also receive back any money that goes unpaid — assuming there is any money left. (The company has acknowledged that $20 billion is not a cap on claims.)

NYT Article.

GIC: Shld have read this before buying BP

In Energy, GIC on 12/06/2010 at 9:16 am

GIC may have lost as much as S$760 million dollars in its investment in British oil giant BP, according to data provided by Bloomberg. Story from Corporate Observer.

Obviously GIC is not aware of this analysis.

Once a company gets very large, its growth rate inevitably slows. Its success will have attracted admirers, inflating its valuation. And then there is “tall poppy” syndrome, the tendency for the leading company in an industry (Goldman Sachs, Microsoft) to be the subject of political and regulatory attack.

Rob Arnott of Research Affliiates has quantified this process. He looked at the Wall Street sectors between 1952 and 2009 and saw how the leading stock in the sector performed over subsequent one, three, five and 10 year periods. On average, the tall poppies underperfomed by 3-4 percentage points a year. Getting exposure to a sector by choosing its largest component is thus the quick route to underperformance. Interestingly, Mr Arnott found the performance was worse when government spending is rising; suggesting that active govcerment means more regulation which means bad news for the big stocks.

Given that sector leaders comprise around one-quarter of the market value of the Russell 1000, that means investors could outperform by almost a percentage point a year by owning the entire sector minus its leader.

MM is vindicated. A few yrs back, he said he doesn’t understand mining, hence GIC did not go into mining projects. What is oil exploration except mining by another name? Temasek better watch out