Shares of BP are getting clobbered again today, down to about $30 per share, or 50% since the rig explosion in late April. Today’s worries are being attributed to two stories. First, talk of a dividend suspension is not exactly new and even if the company did suspend dividends, or as I have suggested, paid out a BP stock dividend rather than cash it should not have any impact on the stock price (shares are not valued off of dividend yields, only cash flows). Also today the New York Times wrote about a possible pre-packaged bankruptcy for BP:
“But all those numbers donâ€™t account for the greatest possible threat: a jury verdict against BP. Such a verdict might push the cost of the spill into the hundreds of billions. If that happened, even BP might buckle.
This outcome might seem far-fetched right now. But on Wall Street bankers have already coined a term for it: â€œthe Texaco scenario.â€ In 1987, Texaco was forced to file for Chapter 11 because it could not afford to pay a jury award worth $1 billion to Pennzoil. That award had been knocked down by a judge from a whopping $10.53 billion.”
Talk about instilling fear into the market. The New York Times forgot to mention that shareholders did not get wiped out in the Texaco bankruptcy, as they normally do in Chapter 11 proceedings. It simply was a restructuring move. BP has now lost half its value, a stunning $94 billion, since the oil rig they were leasing exploded on April 20th. The dividend yield now sits at 11%, even though it seems unlikely BP will ignore political pressures and actually continue to pay out cash to shareholders while oil is still flowing into the Gulf.
As is often the case, the stock market has now entered full blown panic mode with BP stock. It is pretty crazy to watch all of this play out. I can understand if people don’t want to touch BP stock with a ten foot pole, but I am sitting tight on a small long position in client accounts, as I don’t really see how one can argue a $94 billion market value loss is warranted here.
Full Disclosure: Peridot Capital was long BP in select client accounts at the time of writing, but positions may change at any time