Fitch, BP, and Friends: Downgrade To Panic (BP, RIG, APC, HAL)

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Fitch is generally considered third fiddle in a two-agency dominated game of debt ratings behind Moody’s and Standard & Poor’s.  But a ‘timely’ downgrade out of Fitch on BP plc (NYSE: BP) from Tuesday is wreaking havoc all over again for BP shares and only further shows the risks for the oil giant.  Fitch also weighed in very cautiously on Transocean Ltd. (NYSE: RIG) and Anadarko Petroleum Corporation (NYSE: APC).  Oddly enough, it let Halliburton Co. (NYSE: HAL) off the hook….

As far as the BP cut, you rarely see a downgrade to the tune of six full notches.  That is what came late Tuesday.  Fitch downgraded BP’s long-term issuer default rating to just above junk from AA down to BBB.  The concerns over a potentially limitless potential cleanup costs from the Gulf of Mexico oil spill disaster, peer comments turning on the company at Congressional hearings, a likely cut or elimination of the dividend, and the rest of the usual suspects are all the justification for such a deep ratings agency cut.  The biggest issue here now is that the credit default swap rates have continued to widen out.  It is highly unlikely that pensions and investment managers are as eager to buy BP debt as before, but if Fitch lowers its rating again and if suddenly BP finds itself officially listed as a Junk Bond by any of the 3 ratings agencies then its pool of debt buyers will suddenly become much more limited by investment policy mandates.

Transocean Ltd. (NYSE: RIG) and Anadarko Petroleum Corporation (NYSE: APC) were hit as well.

Transocean saw Fitch Ratings affirm its Issuer Default Rating at BBB.  The problem is that Fitch revised the Rating Outlook on its ratings to Negative from Stable, due to the uncertainties relating to the increasing cost estimates and increased political response associated with the Macondo oil spill in the U.S. Gulf of Mexico.  Anadarko’s long-term Issuer Default Rating were affirmed at BBB-, but the issue here is that its outlook was revised to Negative.  This is over the uncertainties relating to rising costs associated with the Macondo oil spill.

On Halliburton Co. (NYSE: HAL), Fitch went very easy on them…. It affirmed its Issuer Default Rating at A- despite potential exposure to the Macondo oil spill, and more importantly the Rating Outlook is Stable.  The reasoning: Halliburton is actually not expected to be exposed to the costs associated with the current BP oil splill out in the U.S. Gulf of Mexico.

The larger problem for BP now is that BP’s credit default swaps have widened out even further.  Reports floating out there now have the five year credit default swap spread on BP at a sharp 590 basis points, or $590,000 per $10 million face.

Fitch’s downgrade was severe and probably worse than what you should expect from S&P and from Moody’s.  It might not matter if the cut is severe or too severe now.   S&P and Moody’s are likely soon to follow suit with additional cuts on BP.

BP ADRs closed at $31.40 Tuesday, and the shares are close to challenging the $30.0-mark this morning.

JON C. OGG

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