A Bounded Problem

September 22, 2010

A Bounded Problem The Capital Markets Impact of the BP Deepwater Horizon Spill James Lucier, Managing Director james.lucier@capalphadc.com

Outline

I.

The BP Deepwater Horizon oil spill from a financial markets and other perspectives

II.

For the market, the oil spill has become a bounded problem

III.

The biggest impact will come from a political narrative that is up for grabs

IV.

The ultimate outcome may turn on the 2012 Presidential election

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

2

A Non-Stop Nightmare Oil News Spill Media Coverage!

Oil Spill Coverage

by Source 70%!

60%!

40%!

Newspapers!

30%!

Online!

Network TV!

20%!

Cable TV! Radio!

10%!

0!

-J un e Ju 6! ne 7Ju 13 ne !

14 -2 Ju 0! ne Ju 21 ne -2 7!

28 -J ul y 4!

Ju ly 511 Ju ! ly 12 -1 Ju 8! ly 1 Ju 9ly 25 26 !

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0%!

Ap

% Newshole*!

50%!

Week!

Source: Pew Research Center, Project for Excellence in Journalism * Percentage of total time (TV, radio), or words (Newspapers, Online) dedicated to coverage of the explosion and spill

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

3

Unknown Parameters

No answer to five basic questions: - How much oil?

- When will it stop?

- What will it cost?

- Where is landfall?

- What exactly happened and why?

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

4

BP Credit Default Swaps and Oil Spill News Coverage!

News Coverage Index (cable TV)!

1-Year BP CDS (weekly close)!

5-Year BP CDS (weekly close)!

800!

70%!

700!

60%!

50%!

500!

40%!

400!

30%!

300!

20%!

200!

10%!

100!

Week!

Au

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1!

5!

26 -

ly

19 -2

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18 12 ril

6!

0%!

2!

0!

Ap

% Newshole*!

Basis Points!

600!

Sources: Bloomberg; Pew Research Center, Project for Excellence in Journalism * Percentage of total time (TV, radio), or words (Newspapers, Online) dedicated to coverage of the explosion and spill

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

5

BP Share Price and Oil Spill News Coverage!

Pew Oil Spill News Coverage Index (all media)!

BP Weekly Closing Share Price!

$70 !

50%!

45%!

$60 !

40%!

35%!

30%!

$40 !

25%! $30 !

20%!

% Newshole!

$ Per Share!

$50 !

15%!

$20 !

10%! $10 !

5%!

Week!

2-

8!

1! ug -A

26

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5!

-2 ly

ly Ju

ly

12

-1

8!

11 !

Ju

5ly Ju

19 Ju

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ul y

4!

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ne

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7Ju

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31

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ay

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6!

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M ay

3M

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Ap

ril

26

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8!

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Ap

12 ril Ap

3!

0%!

5!

$- !

Sources: Bloomberg; Pew Research Center, Project for Excellence in Journalism * Percentage of total time (TV, radio), or words (Newspapers, Online) dedicated to coverage of the explosion and spill

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

6

Oil Spill Timeline and News Coverage!

50%!

June 17 Hayward House testimony

45%!

May 30 Deepwater moratorium

40%!

July 15 Macondo well capped Waxman spill bill passes committee

% Newshole*!

35%!

May 31-June 4 Memorial Day recess

30%!

Rahall spill bill passes committee

25%!

20%!

15%!

10%!

June 30 Bingaman spill bill passes committee

April 29 Washington takes note

April 20 Macondo blowout

July 30 House passes Rahall spill bill, adding Congressional spill commission

Aug. 4 Static kill complete Aug. 10 BP damages fund secured

House leaves for August recess

July 5-9 Fourth of July Recess

5%!

2g Au

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Ju l

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26

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Ap r

Ap r

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12

-1

8!

0%!

Source: Capital Alpha research, Pew Research Center, Project for Excellence in Journalism * Percentage of total time (TV, radio), or words (Newspapers, Online) dedicated to coverage of the explosion and spill

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

7

When BP Means “Bounded Problem”

- Well is capped - No oil ashore - Escrow fund - Consolidated docket - Orderly claims process BP has the market cap, strong cash flow, and assets to meet claims.

The largest claims are government claims for natural resource damages, fines, cleanup costs, and royalties.

© 2010 Capital Alpha Partners, LLC. All rights reserved.

8

BP Share Performance YTD S&P 500 +2.2%

Shell -1%

BP -33%

Source: Google Finance

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

9

Energy Market Impact

- No current production lost; limited price impact - Gulf supplies 1m b/d crude, about the same as Saudi Arabia - 30% of US crude production; 80% from deepwater Gulf - World excess capacity about 6 m b/d, 2 m nonOPEC

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

10

The Spill in Context

-

11 dead

-

4.9 million barrels

-

BP costs in excess of $40 billion

-

Landfall limited

-

No impact on oil and gas prices

1.5 million barrels of oil 15 quadrillion barrels of water in Gulf of Mexico

= 1 part per billion

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

11

The Policy Impact to Prior Spills Past Oil Spills!

6,000,000 !

4,900,000 !

Barrels of Oil Spilled!

5,000,000 !

4,000,000 !

3,500,000 !

3,000,000 !

2,000,000 !

1,000,000 !

260,000 !

100,000 !

- !

Union Oil Santa Barbara!

Pemex Ixtoc I!

Exxon Valdez!

BP Deepwater Horizon!

1969!

1979!

1989!

2010!

-

Environmental Protection Agency (EPA)

-

National Environmental Policy Act (NEPA)

-

Clean Water Act (CWA)

-

California Coastal Commission (CCC)

-

Oil Pollution Act

-

Double-hulled tankers

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

12

The Katrina Narrative

A bigger disaster (in human terms) at a worse time -

At least 1,836 people dead, tens of thousands homeless, 1.2 million evacuees

-

$80 billion in property damage

-

Historic New Orleans feared destroyed

-

Looting, violence, chaos

-

A major port shut down

-

Retail gasoline price spikes and shortages not seen since Iran hostage crisis

A bookend to 9/11 and the opposite end of the trajectory -Bush’s second mid-term Iran contra moment

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

13

Cyclical Political Impact of the Spill

The President’s Spring Agenda

-

A positive, proactive agenda to communicate

-

Energize his base prior to election

-

Kagan, immigration, campaign finance, healthcare defense, middle class tax cuts

-

Energy policy on deck to move next after healthcare and Wall Street--but wiped out instead.

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

14

Presidential Approval Rating Real Clear Politics Presidential Approval Poll Average Approve

April 20 2010

May 6

May 22

Disapprove

July 8 July 19

June 18

August 11

As I read some pairs opposite Source: Realof Clear Politicsphrases, which one best reflects your impression of Barack Obama?!

AsI Iread read some pairs of opposite phrases, which one best As some pairs of opposite phrases, best reflects your impression 0%!

10%!

20%!

30%! 40%!

50%!which 60%!one 70%!

80%!

90%!

100%! reflects your impression of Barack of Barack Obama?!Obama?

When comes to the of presidency Barack Obama, do you...?!

When it comes to theitpresidency Barack of Obama, do you...?

0%! 10%! 20%! 30%! 40%! 50%! 60%!

Trustworthy!0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%! 90%! 100%!

Strongly relate to him as your president!

Not Trustworthy! trustworthy!

Somewhat relate to him!

Feburary 2009!

January 2009!

Not trustworthy!

June 2010!

June 2010!

Warm and friendly!

June 2010!

Relate to him only a little!

Feburary 2009!

Warm and friendly!

Do not really relate to him!

Cold and aloof!

When it comes to the presidency of Barack Obama, do you...?!

January 2009!

June 2010!

Source: NBC/Wall Street Poll, June 2010 40%!

0%!Journal 10%!

20%!17-21, 30%!

When it comes to the presidency of Barack Obama, do you...?!

Cold and aloof!

50%!

January 2009!

60%!

June 2010!

June 40%!

2010 0%! Source: 10%!PSRA/Pew 20%! Poll, 30%!

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

Strongly relate to him as your president!

Strongly relate to him as your president!

Somewhat relate to him!

Somewhat relate to him!

50%!

15

60%!

How would Barack Obama Obama onon thethe following qualities...?!

How would you you raterate Barack following qualities?

0%! 10%! 20%! 30%! 40%! 50%! 60%! 70%! 80%!

Beingeasy easygoing goingand andlikeable! likable Being Being compassionate enough to Being compassionate enough to understand understand average people!average people

January 2009!

June 2010!

Being honest and Being honest and straightforward! straightforward Being firm and decisive in Being firm and decisive in decision decisionmaking! making

When it comes to the presidency of Barack Obama, do you...?!

January 2009!

June 2010!

Source: NBC/Wall Journal Poll, June 17-21, 40%!

2010 0%! Street 10%!

20%!

30%!

50%!

60%!

Strongly relate to him as your president!

Tell me whether the following statement applies to Obama, or not?

Obama is a strong leader

Somewhat relate to him!

Obama understands the problems of people like you

No!

Relate to him only a little!

No No! No! No! Do not really relate to him!

June 2010!

July 2009!

Yes!

July 2009!

July June2009!

2010!

June 2010!

June 2010!

July 2009!

Yes! Yes! Yes! Yes

0%!

80%! 70%! 60%! 50%! 40%! 30%! 20%! 10%!

0%!

10%! 20%! 30%! 40%! 50%! 60%! 70%!

0%! 10%!

10%! 20%!

20%! 30%!

30%! 40%!

40%! 50%!

50%! 60%!

60%! 70%!

0%!

70%!

Source: ABC/Washington Post Poll, June 3-6, 2010

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

16

USA Today Comparative Presidential Approval Ratings

Presidential Approval Rating

President Bush

553 days

Obama at 41% July 27-Aug. 1, 2010

President Obama

1,675 days Bush at 40% Aug. 22-25, 2005 (Week before Katrina)

Days into Presidency Source: USA Today

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

17

The Danger Zone Below 40%

Presidential Approval Rating

USA Today Presidential Approval Ratings 1945-Present

Truman

Nixon

Carter

Bush 43

Year Source: USA Today

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

18

70%!

60%!

Generally speaking, would you say things in this country are heading in the right direction, or are they off on the wrong track?"

50%!

40%!

30%!

Right Direction!

Wrong Track!

20%!

Unsure!

10%!

Source: Ispos/Reuters Poll, July 22-25, 2010

68!

Ju l9 -1 Ju 3! l3 0Au g Se 3! pt 27 -3 1!

O ct O 1ct 5!

29 -N ov 1!

De c 36!

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r3 0-

59!

Ap

ar M

Fe

b

69!

0%!

2009

Generic Ballot

2010

Congressional Job Approval

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

19

Energy/Environment Low on Priorities List; Drilling Still Popular Which of the following is the most important issue facing the country today..?

0%!

10%!

20%!

30%!

40%!

50%!

The economy!

The federal budget deficit!

Illegal immigration!

Health care!

The wars in Iraq and Afghanistan!

Education!

Terrorism!

Energy and environmental policies!

Other!

Unsure!

Source: CNN/Opinion Research Poll, July 16-21, 2010

Should deepwater oil drilling be allowed?!

Should offshore oil drilling be allowed?!

Yes!

No!

Yes!

Not Sure!

70%!

60%!

60%!

50%!

50%!

Not Sure!

40%!

40%!

30%!

30%!

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

12 Au g

9!

18 -1 ly

24 Ju

ne

g Au

Source: Rasmussen Reports

Ju

25

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"!

1-

2

"!

Ju l1 819

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-1 15 n Ju

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8" !

0%!

6" !

0%!

4" !

10%!

5!

10%!

!

20%!

20%!

M

No!

Source: Rasmussen Reports 20

Industry Future

-

M&A drives industry consolidation as costs, permitting time, liability exposures increase

-

Natural gas is still likely central to a national energy independence and clean energy strategy

-

Blowback to excessive media coverage from spill

-

Another oil price spike in 2011-2012 makes offshore drilling an issue for the Presidential cycle

Š 2010 Capital Alpha Partners, LLC. All rights reserved.

21

James Lucier Managing Director +1.202.548.0072 james.lucier@capalphadc.com

Analyst Certification: The following analysts hereby certify (1) that their views about any and all of the subject companies and securities discussed in this report are accurately expressed and (2) that no part of their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report: James Lucier, Charles Gabriel, Kim Monk, and Joseph Engelhard Important Disclosures: This publication is for private circulation and distribution in its entirety; it is provided to you for information purposes only. This is not an offer to buy or sell or the solicitation of an offer to buy or sell any security/instrument or to participate in any particular trading strategy. Capital Alpha Partners, LLC makes every effort to use reliable, comprehensive information, but we do not represent or warrant that it is accurate or complete. The views in this publication are those of Capital Alpha Partners, LLC and are subject to change without notice. Capital Alpha Partners, LLC has no obligation to update its opinions or the information in this publication. Neither Capital Alpha Partners, LLC, nor any respective officers, directors, partners, employees, or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. Analysts may own securities of the issuers discussed herein. © Copyright Capital Alpha Partners, LLC (2009). All rights reserved. No part of this publication may be reproduced, sold, or redistributed without the prior written permission of Capital Alpha Partners, LLC.