BP news and trading recap from Wednesday
I’ve been trading BP options lately. I made a mistake yesterday by selling calls early in the day, essentially betting that the stock wouldn’t have a substantial move upwards. Given that BP execs were going to meet with the president and that there was nearly a 100% chance that they’d agree to something “proposed” by Obama (proposed in the same way that Al Capone would have made a business proposal), it was obvious that there was room for an up move in the stock simply due to a little bit of uncertainty being removed from the situation, at least in the short term.
Anyway, I forgot about all that and sold calls only to have them blow up in my face as the stock jumped about $2 following the news which I had expected.
The stock rallied from down $1 to about up $1, and briefly, near the end of the day, to up $2 before backing off to up about 50 cents for the day.
So, here are the headlines from BP for the day:
- The company will contribute $5 billion a year for 4 years, a total of $20 billion to a fund to pay claims to people in the Gulf area who have lost income or have other “legitimate claims”
- This $20 billion is NOT a cap in their liability and in effect is likely to be a floor even though there is a provision for unspent money to be returned to BP
- The fund will be managed by Ken Feinberg, until recently Obama’s “Pay Czar". While the guy has a decent reputation overall, including having managed a fund to pay victims and victims’ families of the 9/11 attacks, the fact that he worked for Obama raises serious concern that the payout procedure and recipients will be politicized.
- The company is suspending its dividend for at least the rest of this year. That will save the company nearly $5 billion per quarter in cash, easily covering their contribution to the fund.
- Penalties and fines will be paid separately, not from the fund, just an example of how BP’s liability is likely to be well above $20 billion.
- The CEO of the firm made what seemed like a heartfelt apology for the disaster. He’s in an unenviable position given the bad shape the prior CEO, John Browne, left the firm in after he quit following allegations of paying for an apartment for a former young male lover.
One quick note on the dividend suspension: BP bonds rallied on the news because the cash flow improvement increases the chances that BP will make its interest and principle payments on the bonds. But aside from the green eyeshade financial market questions, the BP dividend suspension is a disaster for many retirees in the UK. According to a talking head on CNBC today, £1 out of every £7 of dividends paid by British companies is paid by BP. Many thousands of pensioners rely on these dividends to put food on the table. Sure, there are big investors who own BP stock individually and can live just fine without the dividend for a few quarters. But across the world, retirees who own BP stock directly or own funds which own BP stock for income will be suffering due to BP’s decision. To be sure, BP had no choice (well, they could have possibly cut the dividend in half instead of cut it out entirely, I suppose). But people should not think that the dividend issue is just about a bunch of millionaires or billionaires making a little less money.
My options positions expire at the end of the day on Friday. I’m just going to try to defend myself against a big up move in the stock until then. Unfortunately, the easiest defense is by buying some stock, which then opens me up to risk in the event of a big down move. So, basically, I want the stock to trade in a relatively narrow range. Given how much news there is in this stock, I can’t say I envy my current position. If I get out of this with a small profit, I’ll be happy.
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