Could BP Shareholders be in Line for a Much Larger Dividend?

     On April 20, 2010 BP’s Deepwater Horizon’s oil well in the Gulf of Mexico exploded sending the oil rig to the bottom and releasing crude oil from an uncapped hole on the seabed.  The oil well continued to leak for 87 days.   During the 87 days BP made mistake after mistake trying to cap the gushing well.  The news media had a field day vilifying BP.  They continually broadcast report after report claiming that the Gulf of Mexico is now a wasteland and that it may never be repaired.  

     The media way overhyped the situation.  There was barely any oil that contaminated any beaches.   They kept showing this one stretch of beach in Louisiana that got hit.  It was so comical to see people in hazmat suits on beaches next to sunbathers enjoying the late spring weather.  These people in the suits had literally almost nothing to do- they did not care because BP was footing the bill and they need work during the recession.  

     The disaster stayed mostly offshore.  Nature and some key chemicals helped disperse the floating crude once the gusher was capped.    This seemly ended the issue overnight.

     To try and help their case in the public’s eyes, BP agreed to set up a $20 billion trust fund to help people, businesses, and governments effected by the disaster.   They felt that if they made the money available sooner and to more people that the ultimate cost would be less to shareholders.  They were right.  As of December 1^st, 2011 only $7.710 billion of the $20 billion fund has been spoken for.  Almost 90% of all claims that have been made have been paid out.  BP has also settled a number of potential law suits outside of the courts.  Now that the accident is a distant memory it is hard to see any new claimants coming forward.  This is where the increased dividend comes in.

     The $20 billion trust fund was set up to payout to people impacted by the spill and any fines or lawsuits that may arise.   As of September 30, 2011 BP has paid a total of $9.9 billion into the trust fund.  They are required to contribute $1.25 billion quarterly.  Now that a large majority of claims are settled, does BP still need to make their quarterly payment?  The trust fund allows for its expiration.  In the trust fund document it mentions that the fund has a life until April 30, 2016 OR when all claims have been paid (whichever comes first).  It also has a provision that the trusties can dissolve the trust fund once almost all claims have been paid AND they have 110% of the potential claims covered.    

  

     Let’s assume that future US Government fines and lawsuits amount to $2 billion and the remaining claimants another $1 billion (numbers picked out of the air as what might be reasonable).  With payments made to date there would be no need to add more to the fund after the coming up quarterly payment.

     What should BP do with the extra $1.25 billion per quarter if they no longer need to make the payment?    Should they pay down their debt?  They are currently shrinking it slightly over the last few quarters even when making payments to the trust fund.  If they are able to do this now there really is no need to spend the money there.   In addition they already have a very strong balance sheet.  Should they use the money for additional exploratory expenses to enhance future earnings?  There is a solid argument there but they are already spending close to $30 billion per year there.  Would an additional $5 billion make that much of a difference especially now that crude prices are near peak cycle prices?

     I think spending the money on a larger dividend makes the most sense.   Last quarter they paid out $1.227 billion to shareholders @ $.42 per share (US depository shares- annually $1.68).  At the closing rate per share on the NYSE on December 23^rd, 2011 of $43.28 the stock was yielding 3.88%.  If they doubled the dividend to pay out approximately $2.5 billion quarterly (current payout plus the fund payment) the stock will be paying out $3.36 giving it a yield of 7.76%.    To add credence to this payout amount, BP was paying out $.84 per US share per quarter before the accident.   Back then the shares were trading between $35 and $80.  A move like this would definitely have an impact on the price per share.

     Now the question of when.  I would think you would see a move to dissolve the fund late in the summer 2012.  By then almost everything should be settled and BP will have a solid argument to end funding the fund.  Shortly after that you can expect to see a dividend hike.

Full Disclosure

I own or control between 600 and 1000 shares as of December 27^th, 2011.  I have a vested interest in see the dividend increase.

Will there by a coup d ’at in North Korea?

     Kim Jong-Il has died- about time!  He has looked like death for the last 3 years.  The man was a brutal dictator which led to the deaths of millions of Korea’s, a lot through an unnecessary famine.  He was a megalomaniac which demanded his poor subjects pay homage to him in elaborate annual ceremonies celebrating his birthday.  This is from a country that has one of the lowest GDP per person on the planet.  People were literally dying of starvation but still “had” to show their support. 

     Even in his death he is harming his country.  His chosen successor is his youngest son, Kim Jong-Un.  He was rumored to have been chosen since he is most like Kim Jong-Il.  Kim Jong-Un is only 27 years old.  Let that sink in for a minute.  At 27 I was still drinking and partying on regular basis.  A 27 year old in charge of a large army with nuclear weapons that has been in a constant state of war for over 60 years.   There is no way he will be effective at first.  He will want to be seen as a tough bastard to build his reputation.  Most likely he will have an itchy trigger finger and not the maturity to know the proper course of action.  

      What is likely to happen is another brother or general will work to over throw him.  Hopefully the person that over throws him has the military fully backing him.  If not you will likely see a full blown civil war.  Then it all falls apart, which I would not have an issue with except that they have a vast array of weapons including nuclear missiles cable of reaching South Korea, Hong Kong, Singapore, and possibly Tokyo- all major trading areas.  This could impact large amounts of people and commerce, and thus affect you and me.

     When will this happen?  The most opportune time is in the first few weeks when everything and everyone is thrown into disarray.  This is when there is the greatest chance of a successful coup D’at.  To prevent this, the new leader will likely imprison his brothers to prevent them from butting in.  The longer that time goes by the more likely that a group of generals that control large parts of the military will take over.  Some will do it out of what they feel is the patriotic duty.  Some out of power and profit.  

Days are numbered

     The days of the regime in North Korea are numbered.  When there is a great change like this, especially one where the new ruler did not work their way up the ranking, there is always a great deal of resentment.  This is the spark of the change.  I will be shocked to see Kim Jong-Un in power longer than a couple of years before the military decides that they have other plans.    What happens next is the greater unknown.

    

     I would underweight South Korean stocks for the foreseeable future.  The risks are too high and the market and results too uncertain.  If you want to play the market I would play long-term leaps betting against the Kospi Index and build cash for the time when a coup or war breaks out.  If a coup or war breaks out, this will cause the investors to flee the Kospi market in mas.  Then you can swoop in and buy casually over the next few weeks at bargain basement prices.

     Full Disclosure  

     Nothing to say except I really do not care what happens in North Korea except for its impact on global trade.  As of December 19, 2011 I do not own any leaps in the Kospi index nor do I plan to over the next few days.

What is really the amount of equity on a bank’s balance sheet?

     An interesting thing happened last week in the Lehman Brothers drama.  They finally announced the final settlements for the bankruptcy case that started 3 years prior.  It appears that what some banks view as an asset, are really not one.  Let’s look at the settlement for the moment, and then later derivatives.  

     At the time of bankruptcy it was reported that Lehman had $639 Billion in assets.    They also had $450 Billion in liabilities.  Naturally this would mean they had $189 Billion in net worth once they settled all claims.  Bloomberg is reporting that when everything is finally settled total claims will be around $370 Billion (I assume $80 were not valid claims or were settled in trades).  The interesting thing is that once all the assets are sold they feel that they will likely only get $89.5 Billion in cash back (estimated in the future $65B, $23 B today, and $1.5B in fees).  In my estimation their “assets” were worth only 14¢ on the $1.  Does that mean that other banks are similarly impaired?

     It was further reported that there was a battle between the amount to settle derivative trades versus senior bond holders; specifically Goldman Sachs (derivatives) and hedge fund Paulson & Co (bonds).   Bloomberg is reporting that senior bond holders will only get 21.1¢ on the $1; while derivative holders will get 27.9¢ to 32¢ on the $1.  Speculating here- Goldman recovered more on the derivatives than a hedge fund on the “senior” bonds.  Why is this?  Is it because the hit to Goldman’s “equity” would have been too large?  Goldman is a bank versus a hedge fund.  Did the Fed step in and try and change the payout?  

     Regardless of my suspicions, I think the settlement of derivatives points to the next systemic risk- equity based on derivative contracts are not worth the paper they are printed on.  This is important because so much of JP Morgan, Goldman Sachs, Bank of America, and Citibank (listed in order of derivative traders) “equity” are based on the derivative contracts that they hold.

     There is a fable in Japan where two brothers have a barrel of wine that they want to sell at the market in a distant town to make a bunch of money.  Along the way to the market one of the brothers wanted to stop and have a jug of wine.  Knowing this to be unfair to the other brother, the first brother wrote out an IOU for the value of one jug of wine, which the other brother gladly accepted.  Further down the road the other brother decided he too was thirsty and wanted a jug of wine.  To compensate his brother he too wrote out an IOU for the value of the wine.   The trip to the market was long and hot.  The brothers wound up stopping multiple times for a new jug of wine, each time writing the other an IOU.  This continued until the brothers were too drunk to go further.  They just sat on the edge of the road drinking jugs of wine and exchanging IOUs.  The next morning the brothers awoke with massive headaches, an empty barrel of wine, and a stack of IOU’s. 

     I think if you substitute brothers for the four banks, and the IOU’s for the derivative contracts you will see that the barrel of money is all gone and all they have is IOU’s that they exchanged between themselves, with no real money to pay them back.   Thus this will end the giant confidence game and all four will fail.  It just takes the weakest of them to fail.

     Full Disclosure  

     I do not own or trade any of the stocks mentioned nor do I intend within the next few days.