BP's Borrowing Costs Soar In Wake Of Oil Spill

BP's catastrophe is your gain, at least for now.

There was once this great Dilbert strip, about how Dilbert had lost a fortune from his 401k following the company's stock collapse.  And naturally, he was pretty distraught about this until Dogbert informed him, in that great Dogbert way, that he'd been impersonating Dilbert and managing his investments for some time, putting Dilbert's money into tobacco, sweatshops and diamond mines.  Dilbert, surprised, asks how he's doing, and Dogbert replies: "It's mixed.  You have a 36% rate of return but your soul will burn for eternity."

And you'll find that that's kind of the case with BP bonds (NYSE: BP).  One of the most recent issues, maturing in March of 2019, is offering a whopping 4.75% coupon rate with a 4.556% yield, and currently rated AA by Fitch Ratings.  Granted, oil companies are one of the only good stocks to own right now--along with gold and silver miners and other energy issues--but it's not surprising that the cost of BP's borrowing has gone into the stratosphere. 

But there's a poisonous downside to this high rate--along with, of course, the hit to your karma--and that's the fact that, before this is all said and done, BP is going to have a MASSIVE liability to deal with.  Granted, there are some laws providing something like a ceiling to the payout here, but the costs of the cleanup are already huge, and there's no signs of slowing.  Plus BP has lost a lot of oil already, is losing oil with every passing second, and the hit to its public image is incalculably large.  If you discover that you've got a big old deposit of oil off your coast--and you're a sovereign country--do you call BP to pump it?  Or do you call somebody who HASN'T caused a massive ecological holocaust recently?

Buying BP debt may be pretty solid in the short term--they're making money, no two ways about it--but in the long term, it's not such a cheery picture.


Your code to embed this article on your website* :

*You are allowed to change only styles on the code of this iframe.


Add your Comment