Tuesday, June 15, 2010

BP's Irreverisible Death Spiral - If You Own The Stock: Good Luck, But Good Night

Fitch today downgraded BP's credit rating by SIX notches, from AA- to BBB-, one notch above junk status. The bonds plummeted in price, catapulting the yields on BP solidly into middle junk bond range. I have to say, I spent nine years trading junk bonds on Wall Street and another 11 years following the market. I can't ever recall seeing a company receive a downgrade of this magnitude and not eventually go tits up.  I'm sure it's happened, but I can't think of an example. This is serious shit. Remember Enron? Fitch was the first credit rating agency to finally downgrade Enron debt, even though it had been apparent well before the downgrade that Enron was a zombie. Astonishingly, Moody's and S&P never downgraded Enron until just before it filed. We'll know how much whore and whiskey money BP has bestowed on those two rating firms based on how long it takes them to follow Fitch. I would bet whore and whiskey money that the scumbags at BP lobbied Fitch long and hard in order to avoid a downgrade to full junk status (yes this does happen and I've witnessed the process first-hand).

BP's debt plunged on this downgrade. According to this news report, it sounds like large blocks of BP paper were put out to the market on a "bid wanted" basis: Someone Please Buy My Bonds. What this means is that the market for BP bonds has become very illiquid and there are large institutions who will be forced to sell once the bonds get an official junk rating. Clearly the market sees this coming based on where the yields are now, and some big funds are hoping to beat the sell rush. This is the kind of activity we started to see in the spring/summer of 2008 as the credit collapse was developing.  Typically the bond market is a much better tool to use than the stock market in forecasting the direction of a company's solvency status.  Right now I would interpret the Fitch/bond market activity as putting a 50/50 probability on the likelihood of BP filing bankruptcy.

In addition, BP announced yesterday afternoon that it had hired Goldman, Blackstone and Credit Suisse for financial advisory services.  No doubt BP selected Goldman for its deep and extensive inside connections to the Obama Administration. Blackstone and Credit Suisse are big M&A and restructuring players. My bet is that BP wants to see what a hail mary play involving putting lipstick and a gown on the pig in order to auction it off might look like.

The fact of the matter is that I just can't see any Company in the world taking on the potential liability facing BP. As more and more information leaks out that Obama/BP are trying to cover up, it is looking like this blown well is taking on Armegeddon-like proportions. Yesterday an article appeared in the San Francisco Chronicle in which "a BP engineer described the doomed rig as a 'nightmare well,' according to internal documents released Monday." LINK.   And Clusterstock.com carried an article today in which Matthew Simmons, arguably the most respected oil industry analyst, professed that an attempted relief well will fail and that there is a possibility that a giant undersea lake may already be covering the floor of the Gulf: "The Road" in real life?

I have also had conversations with a couple people who have chatted with industry insiders. Independently, both offered the same type of assessment:  this situation is completely out of control and Obama/BP are trying to cover up as much of the truth as they can; there is no way BP has a shot at containing this - the pressure that has built up in the deep rock formations is much greater than the ability of available technology to contain; the well-head will likely be blown apart; fissures are forming on the Gulf floor from which oil is already leaking into the water (as described: "BP has cracked the earth with this well"); in addition to the obvious and immediate annihilation of the Gulf ecology and environment, if this problem develops into its full potential, the effect on the ocean will have a global effect on the atmosphere and the food supplied to the world by the ocean.

And in summary, I offer two rhetoricals: 1) In his Armageddon vision presented in "The Road," everyone assumes that a nuclear war had occurred, but author Cormac McCarthy never specifically identifies what happened; 2) Do you really still want to own BP stock?


  1. Someone named "Bob" sent 3 great comments on BP and I can't find them. Bob, if you are out there, let me know which post of mine under which you sent in those comments so I can cut and paste them under my most recent post.

  2. For the general mass populace-- what do you think is more important to them, the BP situation or pre-ordering the new iPhone?

  3. I was curious about the effect of the oil on evaporation rates. It seems to me this would be the most direct climate changing effect.

  4. ROFLMAO Rodd

    Anonymous: I think that's one of many aspects that can affect the atmosphere/environment

  5. Rodd-do not forget the importance of posting the order of a new I Phone on Facebook as well as the shipping/delivery updates.

    The reality is that those who do come to a blog like Daves have a different level of interest than probably 98% of the population. Which is part of the reason that "we" cannot discuss these issues with "them".

    I get to go out Saturday nite with some very liberal friends who will continue to think Obama cannot do any wrong-or is that he can't do anything. Give him props for being a good speaker and campaigner. I knew a lot of people who could interview well but could not perform at work.

    Getting the job done was always more difficult than talking about it.

  6. Hal, what are you doing still up? I recommend you drink heavily on Saturday night.

  7. Hal, I agree with Dave. Drink up.

    The Red vs Blue paradigm is total bullshit-- A mind wash for the masses.

  8. I don't know enough about BP to predict it going down. However, I thought the international oil rig owners agreements provided insurance for this type of spill and the corporate veil planning would provide a cap on litigation claims through jettisioning a holding company.

    I assumed Blackstone and Credit Suisse were pulled in to allow BP to jettison a holding company. As far as the bonds are concerned you would have to see if they were US holding company bonds or guaranteed by the parent in the UK.

    I stopped being interested in BP when they got legged over by the Russian oligarchs and you might be right that the company was so hollowed out then it is now going down.

    I assume the risks they took in Mexico were a last gamble to recover from Russia and now they have blown there you maybe right they have blown out everywhere. But normally the US is given the condom treatment by the rest of the world. Just as an example you should look at who produces your mobile phones and how they are structured to prevent class action for brain cancer litigation.

    If the Russian oligarchs did pick BP clean they will go down but the US lawyers and taxpayers will be whistling dixie for their spillage claims in either case as the money is either protected or already gone to the oligarchs.

  9. Dam dave, r we all doomed?

  10. LOL - I hope were not all doomed.

    RE: BP and bankruptcy. You don't have to pour over the BP 10-K to ferret out more about what it looks like behind the facade. The bond market is conveying a lot of information, some of it based on big fund investors who get to see a lot more information behind the GAAP reports than we do.

    BP's book debt/equity ratio is only about 30%. I can't ever recall seeing a company with a D/E ratio this low trading at mid-junk yields. That means the market is already discounting some sort of probability that this event forces BP into insolvency.

    Using instinct and judgement from experience, I doubt BP survives.

  11. Hey, Dave. Just checking in. Getting bad isn't it. Only a matter of days before the real flow rate of over 100,000 Barrels/day is revealed. You are spot on about the sea bed fractures. I've seen some activity up here in the North East...companies are all hot and bothered about getting their Dredging equipment re-certified and sent down. Some big oil barges heading down in an awful hurry as well. All we need now are some tropical storms to whip this into a full blown catastrophe. Does anyone know what will happen to all that oily boom in a tropical storm? I won't even get into health threats from Benzene exposure. Other than that, things are pretty terrible. Check out this link, to see what our emotionally devastated president has been up to, while managing this crisis.


    I am Sofa King...

  12. Dave,

    You did a post back on May 2nd equating this to a nuke event and some "anon" said you had no clue. The fact is, he was the clueless one.

    I had this to say:

    "People have no clue how bad this is. It's already projected to hit the Florida EAST coast next week. This is going to destroy the Gulf coast and the entire east coast and is the death knell for US Empire. Watch it unfold in fear and trembling."

    Let me append with, this is now going to take out the entire global economy in an ELE.

    Joe M.

  13. Dave,

    Those 3 comments from "BOB" were the last comments made to your May 2nd article.

    Joe M.

  14. thx Joe. LOL I've been thinking about that guy who bludgeoned my view. I knew my conviction would bare out and if you notice he hasn't posted a comment since then!

  15. Great color/comments Sofa King. Forget tropical storms, I know someone who just went on a diving trip in the Gulf off the coast of Florida by the Keys. He said even 7 miles out way down below the surface that the water temp is 3-4 degrees warmer than normal and its the warmest at this point in the year that he or his buddy have ever seen. He sent me snapshots of the boat water temp guage. I was 85 degrees way offshore. Inside the 7 mile bridge the water temp was in the mid 90's. He said they didn't any sign of fish (water temp related).

    What this means is the potential has been set up for a really bad hurricane season. Imagine what bad hurricanes will do with all that oil.

  16. Here is commentor "Bob's" comments, which were posted yesterday under my May 2 posting. Joe was kind of enough to find them:

    Google Lyndsey Williams + listen to any interviews
    on You Tube. Last Thursday he blew the LIES apart
    for 2 hours on Alex Jones Radio Show on INFOWARS.COM I believe u can re listen to it there , and YouTube.
    They drilled a SUPERWELL deeper than any other including RUSSIANS . Dude, it is 5 -6 miles into the Earth's Crust where it hit Pressures 5 times what Eqpt could handle. ! mile is depth from surface to Ocean Floor.
    It hit after 2-3,000 FT. of solid ROCK + then hit a new STRATA of molten super hot whatever
    = Pressure has destroyed the pipes,forget the VALVES which are above ocean floor . There are hole in ocean floor all around pipehole. This is Armageddon. No way to fix including NUKING it which no one can guarantee.
    Amount of OIL is not the worst part. Per EPA report last TUESDAY 5 + Flammable TOXIC gases at 1,000times safe levels are escaping + entering the atmosphere causing Cancers , Leukemia, + Birth defects to Humans. .forget the Birds etc.

    Lyndsey Williams also said last Thur it is 4 million gals a day ,not barrels which is insanely more than reported . Just now a new estimate of oil flowing is on Drudgereport .COM . He gets his info from an 87 yr old guy who knows all top OIL crooks + Elites + has an impeccable record of 20 yrs. being right
    Permits should never have been granted for this deep of a SUPERWELL. Now we all know the great risks of screwing Mother Nature that deep in her HOLE ! !
    Williams should be on once a week on INFOWARS.COM with new info

    If you are wise . . .do an analysis of Co.'s who will take it in the shorts from this problem. Short the stocks. People who shorted BP the next day will soon be filthy rich.
    No way BP is not filifng BK . . period

    \The BRITS are really pissed as 1/3 of stock is owned by Retired people in England. This will wipe them out . GET THIS . . . another 1/3 is owned by 401 k's etc in AMERICA. . .
    ASHES . . ASHES . . .we all fall down

  17. Matt Simmons claims 120,000 barrels of oil per day is spewing out of the ocean floor which backs up the comments "Bob" posted about the 4 million gallons per day.

    Interview posted at Zero Hedge:

    This disaster will reduce the carrying capacity of the planet.

  18. What you just pointed out about the carrying capacity of the planet is exactly what one of my colleagues industry sources told him ("don't be so arrogant as to believe that life on this planet can be maintained if this seriously damages the Atlantic Ocean")

  19. Sorry to change the topic, but what are your thoughts on the NYSE de-listing of Fannie and Freddie? Another sign of transparency by this admin? Get them off the big board befroe they disappear on their own?

    Is a separate post coming? I'd love to hear your thoughts.


  20. If true, this is beyond terrifying. Who in America/Canada/Cuba can survive this? In addition to the devastation of the food-sources in the waters of the gulf and East coast, it sounds like we are only a hurricane or two away from major poisoning of much of our primary farmlands. If so, food prices will go ballistic. We will see food shortages. And a mass exodus from the affected areas; possibly toward the West coast.

    Get some food stored. Plant a garden even if you live in Hawaii because serious food shortages could happen by this Fall.

  21. Rothbard - good question. FNM/FRE should've been delisted when they went tits up. I don't know why they formally doing now as opposed to a year ago. Maybe the Govt was hoping they could squeeze the stock higher like it did with Citi and sell stock to the dopes who manage pension money.

    I believe that the official Govt ownership position is a shade under 80%, which allows the Govt to not consolidate the FNM/FRE debt onto the Govt balance sheet. Neat, huh?

    Obama can take his promise of more Govt transparency and shove it up his ass.

  22. Thx for yor thoughts.

    Google the Rev. Scary stuff.

    Life is truly made of glass half full or half empty types. I am a glass 1/2 empty guy. I prefer to know the worst case scenario and make up my mind from there. To me the glass 1/2 full folks have their heads buried under the sand. They paint all negative people/scenarios as crackpots and conspiracy theorists.

    Who will be more prepared? Who will be less hocked when the TRUTH (actual damage) comes out?

  23. Agree. Better to expect the worst outcome and enjoy the surprise of upside rather than be a helium-head optimist and be constantly disappointed. It's easy to figure how this unfolds. Just think the way a criminal would, because that's who's making the decisions in this country.

    It really blows me away that most really intelligent people who sense that something is really wrong, don't want to know how/what/why? It's astonishing.

  24. A grim technical view on the BP Disaster in the Gulf of Mexico


    A draft of this article was posted on www.theoildrum.com originally. Doug R puts the available pieces together and gets a really ugly picture. He also seems (imho) to be more logical than folks like Simmons, who is an investment banker (but who has also done some good stuff in the past).

    I have a slight interest in this...I hope I don't wind up smelling benzene soon.

  25. My parents have an offer on a condo in Naples, FL! I've been begging them to put this off until we know the impact of this massive gusher. They are ignoring my warnings as usual. This is going yto get very ugly. God help us. :(

  26. Well, Naples WAS nice LOL. I have a trading colleague who goes to Naples on business. He said the town is starting to fall apart economically.

  27. Solution For Oil Spill Damage

    To prevent the oil from reaching the beaches:

    Recruit all the fishing boats in the region (and other regions) to line up off the coast and drop their NETS into the water. Place weights at the bottom of the nets so they fall to the sea bottom and stay anchored in place.

    As the oil on the surface and underneath the surface floats toward the coast-line, it will snag on the netting that was originally used for catching shrimp and sardines (small holes). Eventually the small holes in the netting will become filled with thick oil, thus creating a solid wall of oil caught in the netting.

    The fishing boats can them pull up the netting with existing equipment on the boats and have the nets hauled off (by helicopters?) to a landfill at a pre-determined location. The fishing boats will need to be supplied with new, replacement netting as necessary.

    BP Oil Company could pay the fishing boat owners and crew for doing this work, including paying for the netting. This would create an income for the out-of-work fishermen in the area and also stop the oil sludge from reaching the beaches.

    To Stop the Deep-Water Oil Spill: (Broken pipe)

    Try to visualize a man standing inside a circular concrete storm drain. It is huge in circumference. There are thousands of these concrete storm drains all over the United States; they are already built and sitting in storage.

    Some of these storm drains could be purchased and placed around the oil spill pipe at the bottom of the ocean. They are large enough to completely surround the gushing oil spill pipe. Each storm drain pipe could be stacked one upon the other (linked together) all the way to the surface of the ocean. This, in effect, would create a chimney of sorts containing the gushing oil and forcing it upward to the surface of the chimney.

    The chimney of connected concrete storm drains could be anchored in place (to prevent ocean currents from causing swaying of the chimney) by the same braces that are used in building bridges across the bay.

    When the oil reaches the top of the storm-drain chimney on the surface of the ocean, a flexible plastic or rubber prophylactic device could be attached to the top storm drain with a connector that leads to a waiting oil tanker ship which could suck the oil and seawater mixture into the ship’s hold and then taken to Houston to be refined into oil.

    A floatilla of oil tankers could line up round the clock to suck up the oil from the prophylactic device on the surface of the chimney and return to the Houston oil refineries, which is reportedly only about thirty-plus-miles from the oil spill.

    In this way the oil spill would continuously be contained within the storm-drain chimney as the pressure from the oil spill pushes the oil up the chimney to the surface where it would be sucked up into waiting ships.

    I believe that the reason that the cone with a spout that was originally placed over the oil spill by BP did not work was because the pressure issuing from the broken oil pipe was so great that it could not flow through the small spout at the top of the cone, thus causing the cone to float/rise above the broken pipe at the ocean floor. Anyone could see that the pressure from the gushing oil pipe was too great for the small spout at the top of the cone. Why couldn't BP's engineers see that?

  28. If you read the analysis on my latest post, it sounds like BP is making the "attempts" to contain this for show only. The author implies that they know how unstoppable this is. You said it yourself - the pressure is too great. But my understanding, and it's now being verified in several spots, that this type of pressure is impossible to contain.

    It appears that BP cracked the earth and tapped into the fires of hell.