Sunday, June 13, 2010

Spill Bonds

It seems the whole planet has been watching the Gulf of Mexico oil spill. The world cup may provide a much-needed distraction from that unfolding disaster but in any event, analysts and traders are fast at work trying to find ways to make money in the oily turmoil, without appearing to be too oblivious to the plight of shrimp fishermen and seabirds.

Most of the work has centered on stocks, but like always, there is a bond angle to this also. Let’s “explore” and “drill down” to details.

First: the good guys, those trying to clean up this mess. Clean Harbors (CLH) is a name that comes to mind. Its stock is up over 20% since the spill. Its 2016 bonds, on the other hand, have traded flat. If you’re happy with a 7% yield on a BB- rated bond of a company whose prospects were fine and just got a lot better, there’s an idea for you. Clean and simple. The issue is a bit small ($300 mm), but it does trade (Reg S 144A only for now).

Now. the evil enviro-killers. BP jumps out first, of course, While much has been make of BPs stock slide, its bonds have sold off also. Here’s graph of the yield on BP’s 5.25% , 2013s as an example.

BP is still rated AA- by S&P, although we’d expect a downgrade at some point. In any case, the possibility that this spill will send BP into bankruptcy has to be extremely remote. The highest clean up cost estimate out there is $15 billion, which is huge amount of money. But BP can afford that, the company made $20 billion in profits last year.

At the bottom of this post there’s a list of oil spill bonds including some BP USD issues. BP also has issued bonds in Euros, Yens and Sterling, so the whole world can get clean up on what appears to be a temporary bargain.

BP may be the main target of the “spilling fields” disaster, but not the only one. Transocean (RIG) owns the Deepwater Horizon rig, which is leased to BP. Transocean will probably have a bill to pay in this fiasco too, but they too can afford it.

RIG bonds have been submerging also. Here is the yield on the 5.25%% 2013s. Quite a spike.

And there has been substantial “collateral damage also”. A company like Hornbeck Offshore (HOS), which doesn’t drill itself but operates supply vessels to the rigs has seen its stock and bonds hit. Several clients are reneging on their contracts alleging “force majeure” in the offshore drilling moratorium, but HOS isn’t buying that and is countersuing. The bonds have sold off and there is a nice buying opportunity, since the company’s balance sheet is still quite acceptable.

Then there are cases like McMoran Exploration (MMR) and Energy XXI (EXXI). These companies have operations on and offshore in the Gulf area, but the offshore ops are “shallow water”. Shallow water is a whole different animal when it comes to oil spill risk and the ban has been lifted for shallow water already.


  1. Interesting. I believe, however, that the risk of BP going belly-up is actually being under estimated. I dont think they'll see the 20 bln committed to the clean-up escrow ever again and oil prices may tank if the world economy double dips. There an interesting interview of Jim Chanos on Bloomberg. He says that the major oil companies are borrowing their dividend, since their capex increase year on year unlike their revenues. They're essentially being liquidated. N

  2. Hey, nice blog. I was wondering if you could put the CUSIPs on your bond tables... thank you.