Esteban Duarte and Katie Linsell, ©2012 Bloomberg News
Tuesday, February 14, 2012
Article from SF Gate
Feb. 14 (Bloomberg) -- BP Plc is building a war chest before a trial on its role in the 2010 Gulf of Mexico oil spill that may send borrowing costs soaring.
Europe's second-largest oil firm raised $3.3 billion in a two-part debt offering yesterday, according to data compiled by Bloomberg. It sold 1.25 billion euros ($1.6 billion) of notes due in February 2016 to yield 2.18 percent, compared with the 3.47 percent BP paid in May to sell 850 million euros of similar-maturity debt. BP also sold 1.25 billion euros of bonds due in February 2019 at 2.99 percent, equivalent to the yield that investors demanded in December to hold its existing bonds due October 2017.
BP, which is scheduled to go to trial on Feb. 27 to determine liability and apportion fault for the Gulf disaster that dumped 4.1 billion barrels of oil, the worst offshore spill in U.S. history, is taking advantage of fourth-quarter earnings last week that beat analyst expectations to sell debt. The London-based company said cash flow may rise 50 percent by 2014, compared with last year, if oil remains around $100 a barrel.
"Once the trial starts at the end of February, investors' mood could change, so borrowing conditions for the company could be less attractive," said Tony Bauchet, a Paris-based senior analyst at Axa Investment Managers, which oversees 515 billion euros of assets. "BP is smart issuing on the back of a very strong 2011 earnings and at a moment that its borrowing cost had declined significantly from the record levels since in June 2010."
Gulf Spill
The cost of protecting BP's bonds with credit-default swaps jumped over the two months after the spill to a record high 577 basis points, according to data provider CMA, which is owned by CME Group Inc. and compiles prices in the privately negotiated market. The swaps were at 116.6 basis points today. A basis point equals 1,000 euros annually on a swap protecting 10 million euros of debt.
David Nicholas, a BP spokesman in London, said the issue was part of the company's general funding requirements and declined to comment on its reception in the bond market.
The April 2010 Macondo well blowout and explosion killed 11 workers. The accident spurred hundreds of lawsuits against BP and its partners, including Transocean Ltd., the Vernier, Switzerland-based owner and operator of the Deepwater Horizon drilling rig, cement maker Halliburton Co, and Anadarko Petroleum Corp., the owner of 25 percent of the well.
Debt Reduction
BP's borrowing costs are falling even as it said in a Feb. 7 regulatory filing that net debt rose to $29 billion at the end of the fourth quarter from $25.9 billion a year earlier. The company said it's trying to reduce the ratio of net debt to net debt plus equity to less than 15 percent. At the end of last year, that was 20.5 percent, compared with 21.2 percent a year earlier, according to the filing.
BP plans to sell $38 billion of assets, including its Texas City and Carson refineries. BP executives also pledged to increase the company's cash flow by 50 percent by 2014 by focusing on the most profitable production projects.
Even as the company is deleveraging, it expects to add 10 billion to 20 billion barrels of oil equivalent in reserves in the coming 20 years, according a Feb. 7 investor presentation. BP is rated A2 by Moody's Investors Service, the sixth-highest investment grade. The outlook on the company's debt is stable after it took a $41 billion charge for costs related to the oil spill, the rating company said in a Feb. 3 statement.
'Considerable Production'
The ratings also continue to be underpinned by "an extremely large and diversified reserve base and considerable production despite the ongoing divestment of upstream assets that are mainly mature and low-growth," Francois Lauras and Olivier Beroud of Moody's said in the report.
The company's 2.5 billion-euro bond offering yesterday was its largest sale in the European currency and its biggest issue since March, when it issued $3.7 billion in dollars, according to data compiled by Bloomberg.
The four-year notes sold yesterday yield 75 basis points more than the benchmark swap rate, compared with the 85 basis points that it originally offered, while its seven-year debt was priced at a 103 basis-point spread, seven basis points less than the guidance, said a banker involved in the deal, who declined to be identified before the transaction was completed.
"BP offer a good geographical diversification versus financial and the rest of issuers in the euro zone," said Nicolas Gouju, a Paris-based fund manager at Groupama Asset Management SA, which put in an order to buy some of the bonds. "Even as absolute yields have declined, compared with previous new issues, it is still a good premium versus the secondary market."
Pollution Claims
The company is negotiating with U.S. officials to settle pollution claims over the 2010 Gulf of Mexico oil spill that may leave the company liable for as much as $17.6 billion in fines, a person familiar with the talks said.
The government cited the energy company for violations of the federal Clean Water Act for the offshore spill, the biggest in U.S. history. Officials are seeking fines of as much as $4,300 for each barrel spilled after the explosion of the BP- leased Deepwater Horizon oil rig.
BP has reached settlements with well partners Anadarko and Mitsui & Co., as well as with Cameron International Corp., the maker of the blowout prevention equipment for the well. It has yet to reach agreements with Transocean or Halliburton.
'Fairly Good Outcome'
In a separate case, BP lost a court bid to dismiss fraud claims by investors who said the company lied before and after the 2010 Gulf of Mexico oil spill about its accident response capability. U.S. District Judge Keith P. Ellison in Houston yesterday allowed holders of BP American depositary receipts to go forward with claims alleging violations of U.S. securities law. He dismissed the claims by investors who bought BP stock, saying his court has no jurisdiction.
"They've been issuing bonds in part to raise their cash levels, in case they need to settle, or are found to have been 'grossly negligent', and need to make a large cash payment," said Michael Ridley, an energy and utilities credit analyst at Mizuho International Plc in London. "The yield on their bonds is predicting a fairly good outcome from the court case."
--With assistance from Brian Swint in London and Margaret Cronin Fisk in Southfield, Michigan. Editor: Mitchell Martin
To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net; Katie Linsell in London at klinsell@bloomberg.net
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
Article from SF Gate