Oil slick may not stick to BP, Halliburton bonds

*BP, Halliburton bonds poised to rally

*Clean-up costs, litigation on horizon

*Large cash reserves may absorb losses

By Walden Siew

NEW YORK, May 19 (BestGrowthStock) – The giant Gulf of Mexico oil
slick that has tarred the reputation of BP Plc (BP.L: ) (BP.N: ),
Halliburton (HAL.N: ) and other companies tied to the sunken $560
million oil rig may not stick to BP bonds.

Bonds of BP Plc and related company debt were battered in
the wake of the April rig explosion and sinking, but may now be
poised to rise.

The bet for investors will be whether energy giant BP,
Halliburton and Transocean Ltd, (RIG.N: ) (RIGN.S: ) owner of the
doomed Deepwater Horizon drilling rig hired by BP, can
withstand the mounting clean-up costs, litigation and penalties
on the horizon.

Costs to protect some bonds of BP against default have
doubled since a month ago, along with the risk premium to hold
bonds of BP, Halliburton and Anadarko Petroleum, a minority
owner of the well.

But large cash reserves, strong cash flow and access to
loan lines will likely buffer the companies from crippling
losses, if the clean-up effort can be contained and under
control within 90 days, credit analysts said.

“As awful as it is as an environmental disaster, the
financial costs to BP will come with the clean-up and potential
penalties,” said Brian Gibbons, senior oil and gas analyst at
CreditSights in New York. “They will be able to muster through
this, no problem.”

BP’s annual report showed $8.3 billion in cash on hand at
Dec. 31, and cash from operations of $27.7 billion.

BP generates $13 billion in free cash flow a year, has $5
billion to $8 billion in cash on hand and access to loan lines
if necessary, according to various analysts’ estimates.

Halliburton 30-year bonds, rated in the single A range, had
traded around 100 basis points over Treasuries before the oil
rig explosion, and widened to nearly 200 basis points after the
extended clean-up efforts.

Most industrial company bonds with similar ratings trade at
about 100 basis points, which may signal a buying opportunity
for Halliburton bonds, according to Brian Beargie, an analyst
with Legal & General Investment Management America, one of the
largest asset managers in the UK.

Halliburton provided the cement work for the well but may
have limited liability, said Beargie, whose firm manages $15
billion of assets, primarily high-grade bonds.

Halliburton does not expect to incur any damages related to
its work on the Macondo well blowout, the company’s CEO said on

“We believe we are fully indemnified,” Chief Executive Dave
Lesar told shareholders at the annual meeting.

The April 20 blowout caused the Deepwater Horizon rig to
explode and sink, killing 11 workers and causing a massive oil
slick that is still growing as the well continues to gush
crude. For details, see [ID:nN19235565]

“From a legal perspective, Halliburton is in much better
shape than the other oil names,” Beargie said. “Their financial
liability is fairly limited.”

Beargie is not as bullish on BP and Anadarko, however.

“BP and Anadarko face unknown liability and offer excessive
risk versus the potential reward,” he said.

Donald van Deventer, chief executive officer of Kamakura
Corporation in Honolulu, Hawaii, compares BP’s troubles to
Toyota Corp in the wake of a recall crisis.

Both companies have boat loads of cash, very low levels of
leverage, and in Toyota’s case, its bonds did not take a hit. A
third point in BP’s favor is they are also insured, he said.

“The CDS market has overreacted,” van Deventer said.

He said he sees value in BP and Anadarko debt.

For a video analysis see http://link.reuters.com/hah25k

Still, mounting legal costs may weigh on demand for BP and
related debt. In the 1989 Exxon Valdez case, the company was
tied up with legal proceedings for two decades.

BP is expected to pay billions of dollars to clean up the
spill, which continues to expand and could begin to threaten
southern Florida in the coming weeks.

“This is going to be most likely an equally long and
torturous legal process like the Valdez,” Gibbons said. “Value
at this point in the game is very speculative. We don’t know.
There’s really no good handle on what the clean-up cost will

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(Reporting by Walden Siew and Matt Daily; Editing by Kenneth

Oil slick may not stick to BP, Halliburton bonds