Investors seem confident about BP ahead of top brass showdown in Washington this week

Bond managers have started buying into BP after a turbulent week, believing the reaction in the fixed income markets has been overdone and the oil giant has the financial strength to fund the costs of its leaking oil well.

Roger Webb, investment director at Scottish Widows Investment Partnership, which has been adding small amounts of risk in BP across a number of bond portfolios said that the dollar bonds in particular look quite cheap.

US and European investors offloaded BP debt last week, spooked by the political rhetoric coming out of the US when president Barack Obama heeped criticism on the company and a seemingly endless flow of negative headlines. 

When he meets BP’s top executives in Washington on Wednesday Obama is expected to demand that they provide a substantial amount of money to an independent mediator who will handle claims from people and businesses harmed by the environmental disaster. 

BP shares hit a 13 year low on Thursday after US politicians called for it to suspend its dividend payments. US scientists have also doubled their estimate of how much oil has been gushing from the crippled Gulf of Mexico well.
 
But some fixed income managers have stuck to their guns. ‘We are concerned about the incident, but it is starting to be priced in now. The bonds are trading at high yield levels, which is overdone,’ said Theo Stamos, head of credit at Investec Asset Management.
 
Paul Owens, a member of the fixed-income team at Liontrust draws a comparison with Johns Manville, a US insulation manufacturer, which filed for bankruptcy in 1982 after it was hit by an asbestos lawsuit.
 
‘Eventually it turned out to be a good investment, but you had to be patient. Warren Buffett made a lot of money on that. That’s what I think you have to do here,’ he said.
 
Owens believes it is unwise to take a position either way until the extent of BP’s liabilities are known and how these will be handled. ‘Will that be through a cut in the dividend or through a restructuring? Until I know what those liabilities are, I can’t make an investment,’ he added.
 
As one of the richest oil companies in the world, BP has nearly $7 billion in cash on hand and the capacity to borrow about $15 billion, according to Wall Street investment reports. The company is expected to generate $34 billion from continuing operations this year, from which it had planned $10.5 billion in dividends and $20 billion for capital investments.