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BP's stock price and the now-or-never trade
????Religion usually has no place in the financial markets -- except for those who are doing God's work, of course -- but the faith that BP shareholders have in their holdings can only be explained by belief in a higher power. ????No matter what happens to the company, no matter how dim its prospects or deep its troubles, investors are waiting to cheer. BP's (BP) stock price has been loftier for days, for instance, because of the prospect of divine intervention in the form of a foreign investor. Reports said that a deep-pocketed Middle Eastern sovereign wealth fund, such as the Kuwait Investment Authority or Libya, might be interested in buying a stake in the struggling oil giant. (The Gulf states looking out for the Gulf states, in a neat geographical symmetry.) ????Then today the company said it wouldn't issue any new shares to a white-knight investor to cover the oil-spill costs. If BP shares got a boost from the possibility of a new investor, then they should drop when the company says one won't materialize, right? ????Not exactly. BP's shares are up a whopping 12% in London and its American Depositary Receipts closed up nearly 9% in the U.S. on Tuesday. ????For anyone who doesn't own shares, it's difficult to understand the optimism behind these moves, or indeed, behind any show of faith that BP's future will be sunnier than its past. BP's oil-spill cleanup costs have already hit $3 billion after only three months; now that oil has washed up in Galveston, Texas, it means all the Gulf states are affected and cleanup costs will only rise. BP is paying high interest rates already to borrow, with the company's bonds priced not too far from junk. England reportedly already started work on contingency plans in case BP collapses. The trendline so far appears to be largely downward. What does BP think about its share price? ????Analysts at RBS, of course, disagree. They upgraded BP today, accounting for a significant part of the boost in its shares. The RBS analysts argued that BP's relief-well efforts should succeed by mid-July, which would improve the company's prospects of controlling the oil spill and would make its shares inexpensive at their current level. ????BP's actions seem to indicate that the company believes something like this too. The company's approach to corporate finance has been strangely revealing. Corporate finance decisions - whether to, say, sell equity or raise debt - are the tea leaves that many investment bankers read to understand how a company is thinking about its options and sees its future. ????Normally companies that are worried about their cash balances - as BP should be, with its rising costs - would raise equity by selling stock. Selling stock dilutes current shareholders but is much cheaper, since borrowing debt means paying high interest costs which could take valuable dollars out of the till. ????The fact that BP is going with debt instead of equity could indicate that the company itself does not want to sell its shares at such a cheap price - which, in turn, means that it believes that its shares could appreciate in the future. BP may also be avoiding selling shares at this price for other reasons. Incoming buyers or investors are likely to drive a hard bargain, valuing shares below where they are now. Selling shares under those circumstances could create a panicky or "fire sale" image that would affect BP's ability to set an attractive price on other deals, such as selling assets to raise money. ????All of those reasons may be why BP has clearly decided to go with borrowing money rather than raising equity. And why not? The debt markets so far have been welcoming to the company's plans. Dow Jones reported today that BP has asked nine banks, including Barclays, Citigroup, HSBC and Societe Generale, to increase the size of a loan now worth $9 billion to help the company with its oil-spill costs. ????What is interesting is that investor faith in BP extends to every part of the markets: stocks, bonds, and even credit-default swaps. Call it the now-or-never trade: if BP doesn't fail in the short term, as investors are betting, it never will. For instance, investors in BP's credit-default swaps rate the company's likelihood of default higher in the next 12 months than over the next five years. ????In the meantime, the company has a lot to clean up yet as the oil spill continues to devastate Gulf economies. That's the real now-or-never.
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