And you thought BP was just an oil company? It is interconnected with the larger economy in many...

And you thought BP was just an oil company? It is interconnected with the larger economy in many ways, but its role as a major player in the derivatives market could prove particularly destructive if it defaults, Econotwist says - even worse than Lehman Brothers.

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Comments (12)
  • Tom Au, CFA
    , contributor
    Comments (6879) | Send Message
    Another reason why we should have banned these "financial weapons of mass destruction."
    2 Jul 2010, 03:55 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (6205) | Send Message
    Hopefully their derivatives positions are hedges and not speculation.


    There were a number of utilities that went bad when their energy trading activities morphed from hedging to speculation, Enron for example, AYE had some problems of that type, which they have put behind them long ago.


    There oughta be a law.
    2 Jul 2010, 04:02 PM Reply Like
  • Tom Au, CFA
    , contributor
    Comments (6879) | Send Message
    Derivatives should require the same thing as insurance policies:
    An insurable interest.


    That way, at least one side will be using them for genuine hedging, not speculative purposes. (Of course the "insurer," e.g. Goldman Sachs, will have a speculative position.
    24 Jul 2010, 01:07 PM Reply Like
  • Alan Young
    , contributor
    Comments (2414) | Send Message
    Agree with Tom: most likely the derivatives are hedges on oil pricing, etc. But even if not, in case of bankruptcy the BP-US subsidiary would be spun off, and the parent corporation would likely remain solvent. So perhaps the story is a bit overblown.
    2 Jul 2010, 04:07 PM Reply Like
  • 1980XLS
    , contributor
    Comments (3360) | Send Message
    The politicians will destroy it , and then have to bail it out to prevent
    "systematic risk"


    I doubt it falls under any of the new "Finreg" provisions.


    Then they get to choose which counterparties get taken care of.


    AIG II


    It's all about control, "never let a crisis go to waste"

    2 Jul 2010, 04:25 PM Reply Like
  • Calling the Idiots Out
    , contributor
    Comments (5) | Send Message
    That article is about as credible as me writing about nuclear technology. Off-balance sheet transactions? SPEs? Interest Rate and Currency Swaps? Has that idiot even looked at a Annual report for BP? Does the moron know the difference between mark-to-market and accrual accounting? Does he understand that Enron and Lehman were both 'paper' companies vs. BP which owns $billions in physical assets. And what actual substance other than quoting some Moody's % is he actually providing? Sure the derivatives market is $trillions, but most of that is paper (i.e. debt securities and currencies which DWARF energy derivatives). In a word, simply a fool that's probably talking his book.....
    3 Jul 2010, 01:03 AM Reply Like
  • iTrax
    , contributor
    Comments (8) | Send Message
    Well. I’m the idiot/moron/fool who wrote the article in question.
    This idiot has in fact read several of BP’s annual reports, and let me quote from the 2009 annual:


    “Gas and power marketing and trading activity is undertaken market both BP production and third-part natural gas, support LNG activities and manage market price risk as well as to create incremental trading opportunities through the use of commodity derivative contracts. Additionally, this activity generates fee income and enhanced margins from sources such as the management of price risk on behalf of third-party customers. These markets are large, liquid and volatile.”
    “In connection with the above activities, the group uses a range of commodity derivative contracts and storage and transport contracts. These include commodity derivatives such as futures, swaps and options to manage price risk and forward contracts used to buy and sell gas and power in the marketplace. Using these contracts, in combination with rights to access storage and transportation capacity, allows the group to access advantageous pricing differences between locations, time periods and arbitrage between markets.”


    BP has been able borrow with AAA yield anywhere on the curve and lend to less credit worthy entities at attractive spreads. These lending differentials are the fuel of the $430 trillion Interest Rate Swap OTC market.
    BP has been able to spin off $20 billion of earnings for the last 5 years, and $15 billion in cash last year.


    “Natural gas futures and options are traded through exchanges, while over-the-counter (OTC) options and swaps are used for both gas and power transactions through bilateral and/or centrally cleared arrangements.”
    “These contracts (OTC) are typically in the form of forwards, swaps and options. Some of these contracts are traded bilaterally between counterparties; others may be cleared by a central clearing counterparty. These contracts can be used for both trading and risk management activities. Realized and unrealized gains and losses on OTC contracts are included in sales and other operating revenues for accounting purposes.”


    This moron does in fact know the difference between mark-to-market and accrual accounting, and why the OTC contracts are included in “sales and other operating revenues for accounting purposes,” which totaled $213 billion in 2009, in where sale of crude oil through spot and term contracts amounted to $35, 6 billion.


    Off-Balance Sheet
    “BP uses derivative instruments to manage the economic exposure relating to inventories above normal operating requirements of crude oil, natural gas and petroleum products as well as certain contracts to supply physical volumes at future dates. Under IFRS, these inventories and contracts are recorded at historic cost and on an accruals basis respectively. The related derivative instruments, however, are required to be recorded at fair value with gains and losses recognized in income because hedge accounting is either not permitted or not followed, principally due to the impracticality of effectiveness testing requirements.”
    “Gains and losses on these inventories and contracts are not recognized until the commodity is sold in a subsequent accounting period.”


    According to the 09 annual statements, financing agreements of $6, 48 billion is held off balance sheet. Additionally, the BP group has issued third-party guarantees with amounts outstanding at $319 million of liabilities of jointly controlled entities and associates, and $667 million in respect of other third parties - also off balance sheet.


    BP’s subsidiaries in the Gulf – Arosa Funding Limited, Halliburton, Anadarko Petroleum, Transocean Inc., and Cameron International – are all placed under credit watch with negative outlook.


    BP own (fully or partly) 3.689 refineries around the word, and 22.400 retail sites. These retail sites are not just gas stations, but increasingly expanding into new areas like food and clothing.


    This fool does in fact understand the difference between Enron, Lehman, Bear Stearns and BP. But he also sees the similarities; these companies failed because their primary assets deteriorated rapidly, which in turn triggered materialization of their exposure to the derivative market, resulting in insolvency and finally default.


    BP borrowed $11 billion in 2009, and have (as of January 2010) $34, 6 billion in debt – most of it cut in pieces and sold worldwide through their banking network as a mighty fine collection of collateralized, securitized, synthesized and highly leveraged fixed income assets.


    BP’s issue of CSOs equals 18% of the global total rated by Moody’s.


    BP’s credit rating has been cut to junk by Fitch, to BBB from AA. As a result, the price of BP’s Credit-default Swaps has jumped to nearly 600 bps, up from 44.


    One of BP’s 5-year bond series, maturing in 2012, was recently trading with a yield of 9, 48%.


    And on top of this, BP is supposed to come up with another $50 billion to clean up the oil spill, as public pension funds are preparing to sue the company for the money they’ve lost by investing in BP shares.


    Now, before you call someone an “idiot”, a “moron” or “fool”, be sure you know what you’re talking about, or you will be the one ending up looking stupid….


    (1) 06-21-10 BP's Bankruptcy Would Impair 117 (18% Of Total) Collateralized Synthetic Obligations, Lead To Pervasive Losses Zero Hedge
    (2) 06-16-10 BP CDS Curve Goes Nuts, 1 Year Passes 1,000 Bps, No Offers In Market Zero Hedge
    (3) 06-25-10 BP Getting Crushed: What Does its ‘Yield Inversion’ Mean? WSJ
    (4) 06-28-20 Interactive timeline: BP oil spill disaster Financial Times
    (6) 06-25-10 BP reassures on cash pile as shares plunge Financial Times
    (7) 06-18-10 Macondo, in historical Hollywood context FT Alphaville
    (8) 06-10-10 BP short interest, other facts and stuff (updated) FT Alphaville
    (9) 06-24-10 BP Bankruptcy in U.K. Is Obama’s Worst Nightmare Caroline Baum Bloomberg
    (10) 06-21-10 BP and Anadarko turn on each other FT Alphaville
    (11) 06-20-10 Internal BP Document Confirms Matt Simmons' Worst Case Prediction Of Spill Rate Of 100,000+ Barrels Per Day Zero Hedge
    (12) 07-01-10 ”Sultans Of Swap” Tipping Point
    3 Jul 2010, 05:31 PM Reply Like
  • Calling the Idiots Out
    , contributor
    Comments (5) | Send Message
    Trust me, I do know what I'm talking about. Your analysis is simply BUNK!


    $200B+ of PHYSICAL, not paper ASSETS like Lehman and Enron
    billions of barrels of PROVEN reserves--THESE ARE THE PRIMARY ASSETS, not fictitious paper


    CFO $30B+....capex $20B, divs $10B


    SPEs? LOL


    BP is a lender? LOL


    plenty more if ya wanna hear FACTs that matter
    8 Jul 2010, 01:38 PM Reply Like
  • iTrax
    , contributor
    Comments (8) | Send Message
    I salute you - and respect your serious comments.
    However, I'm not out of ammuntion, yet:


    "There are some notable positions particularly among the large commercial hedgers like oil companies, that pose a moderate risk though not an alarmingly large one," said Darrell Duffie, professor of finance at Stanford University in California.
    "If a large industrial company fails and its counterparty was depending on their performance, the counterparty would be harmed unless they provided collateral," he said.


    BP is one of the largest corporate users of derivatives and enters into commodity and other private derivatives, in addition to exchange traded contacts. The company reported around USD 10 billion in derivatives assets and over USD 9 billion in liabilities at the end of the first quarter.


    And here's the case of point:
    Royal Dutch Shell also reported USD 20.45 billion in derivatives assets and USD 18.74 billion in derivatives liabilities at the end of 2009. Derivatives assets at the company had been as high as USD 40.62 billion at the end of 2008, while liabilities stood at USD 38.87 billion.
    Do you really think there's that much of a difference in the two companies derivatives holdings?


    Knight's Yelvington:
    "Ultimately the risk posed by industrial companies will depend on how effective hedging strategies employed by their bank counterparties are."
    Do you know who BP's bank counterparties are? Or how effective their hedging strategies are?


    You keep going on about BP's physical assets: in my experience the true value of the assets don't matter much when the market loose its confidence in company's ability to honor their liabilities.


    BP Group has total assets of $236bn - net worth is $102bn. - share capital 5,2bn (now; about 3bn).


    Total liabilities per December 31. 2009: $134 billion - than you can add the recent clean up costs, the skyrocketing funding/financial costs and a number of billions in settlements, law suit related expenses and new fines.


    Sounds reassuring to you?


    By the way; of estimated net proved reserves of liquids (10,5bn barrels) 5,6bn comes from BP subsidiaries, 4,8bn is equity-accounted entities.


    Estimated net proved reserves of natural gas (45,1bn cubic feet), 40,4 from subsidiaries, 4,8bn is equity-accounted entities.


    Net proved reserves on an oil equivalent basis (18,3mn barrels), 12,6 subsidiaries, 6,7bn equity-accounted entities.


    No paper assets?


    What's your definition of a SPE?


    Need to know before I continue....
    8 Jul 2010, 09:58 PM Reply Like
  • Calling the Idiots Out
    , contributor
    Comments (5) | Send Message
    What BP was is a distressed security, and those that did their due diligence and ignored all the noise in the media (e.g. articles like the one you posted) have been handsomely rewarded while the 'sure thing' shorts are getting destroyed (I hope for your sake that you have little or no exposure betting on the downside).


    Taking the FACTs as known today and NOT SPECULATING about the future outcome of the near-definite litigation that will take YEARS to settle is all you need to listen to. Sure there could be a derivatives catastrophe. Sure oil could sink back down to $50 and wipe out BP's primary source of cash flow. Sure they could get hit with fines, lawsuits, etc. that total in the billions if not 100s of billions. But that's all pure speculation at this point, and that's assuming that BP is the guilty party here...until they can retrieve the blowout preventer from the seabed floor (a potentially HUGE piece of evidence), no one knows all the pertinent pieces of information that caused the explosion and who ultimately bears responsibility for this accident.


    BP's management team, outside consultants, government authorities, et al. have plenty of time to appropriate put forth in motion action today and do everything in their collective power to prevent the failure of BP and learn from this accident to avoid it again. Like anything else, there will be ebbs and flows of information that will impact share performance, and perhaps you may ultimately be proven right, but thinking on the optimistic side of the fence, what if BP emerges from this incident, a much leaner, much stronger and safer company with a portfolio of rock-solid assets (after they liquidate marginal assets to help solidify their balance sheet) in a long-term environment of rising crude prices (demand is not gonna fall off a and productive resources are diminishing)?.....therein lies the potential silver lining to all of this. All I can suggest is short-seller may end up with a derivative crisis of your own!
    12 Jul 2010, 08:19 PM Reply Like
  • Calling the Idiots Out
    , contributor
    Comments (5) | Send Message
    Some more good news for anyone following BP:


    Here's Why The Oil Spill Is Overblown And The Gulf Coast Is Doing Fine


    9 Charts That Paint A Surprisingly Bright Future For $BP
    24 Jul 2010, 10:44 AM Reply Like
  • Calling the Idiots Out
    , contributor
    Comments (5) | Send Message
    More insight into the recent asset sale from


    $166million in EBIT for proceeds of $7B...sounds like a pretty good deal for BP.....I suppose the conspiracy theorists can argue that Apache and BP are in bed together LOL


    BP agrees first material set of asset divestments – BP has agreed to
    sell upstream assets in the US (onshore – Permian Texas and SE New
    Mexico), Canada (onshore – western) and Egypt (onshore – western
    desert and East Badr El-din) to Apache Corp for $7bn cash, subject to
    post-completion adjustments. The effective date for each of the
    transactions is 1 July 2010. The assets in each country will be sold to
    Apache as separate packages and are expected to complete in Q3 2010.
    70% of the official target of $10bn of divestments – We have long said
    that BP has numerous assets that it can sell where there are ready buyers
    that need not compromise the core of its upstream growth strategy. As a
    test of the strategic importance of the assets sold to Apache, we
    challenge investors to find much or any reference to them in BP’s recent
    key strategy updates. Note that today’s news does not relate to assets in
    the North Sea, the North Slope or Argentina – these remain divestment
    options, in our view.
    Sale mechanics brings in $5bn cash by end July – Apache will pay BP
    a cash deposit of $5bn on 30 July 2010 – split $3.25bn for Canada,
    $1.5bn for US Permian and $0.25bn for Egypt. Regulatory approvals
    must be obtained by 29 October 2010 (Permian assets), 31 Jan 2011
    (Western Canadian assets) and 19 July 2011 (Egyptian assets) –
    otherwise BP has agreed to repay the relevant deposits to Apache.
    Certain unspecified assets bear partner pre-emption risk.
    Exit terms look very robust, especially when compared to BP’s
    depressed valuation – Contrary to the fears of some that BP would be a
    distressed seller, the deal metrics look very robust and highlight the gulf
    between underlying realizable asset valuations and BP’s depressed stock
    market valuation. The aggregate EBIT of the assets sold in FY 2009 was
    $166m – this is less than 1% of 2009 group EBIT (22.7bn) and the
    implied EV/EBIT multiple is over 42x. Note that BP now trades on a
    2010E EV/EBIT multiple below 5x. The net book value of the assets
    sold at end 2009 was $2,998m – so the implied price to book value is
    2.3x. Note that BP trades on 1x NBV.
    (Yellow – taxloss)BE
    So it looks like a decent price, despite BP being the most distressed of sellers.NH
    Reserve metrics are very notable – Given total proven reserves sold of
    360 mmboe, the headline combined reserve multiple is $19.4 per boe.
    Note that BP trades on an EV per proven multiple of $8.1 per boe. If we
    adjust BP’s EV for a conservative downstream valuation ($75bn), BP
    trades on an adjusted EV per proven multiple of just $4.0 per boe. Note
    that BP has sold 2% of its YE 2009 proven reserves (18.3bn boe) and
    raised cash equal to 6% of its current market capitalization. Note also
    that BP has only sold 2.5% of its YE 2009 total resources (63.6 bn boe) and the average resource multiple is $4.5 per boe. On a downstream
    adjusted basis, BP trades on an EV per resource barrel of just $1.1 per
    24 Jul 2010, 10:48 AM Reply Like
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