Total Leads Surge in Oil Company Default Swaps on Gas Leak

Total Leads Surge in Oil Company Default Swaps on Gas Leak
Total SA's Elgin platform is seen in the North Sea. Source: Total E&P UK via Bloomberg

Total SA led a surge in the cost of insuring debt of European suppliers after a gas leak from France’s largest oil producer’s Elgin platform in the U.K. North Sea entered its fourth day.

Credit-default swaps on Total soared 22.5 basis points to 102.5 basis points, according to CMA at 3 p.m. in London, the highest since Nov. 29 and up from 60 basis points March 26. Swaps on ENI SpA jumped 17 to 144, Transocean Ltd. rose three to 47, BP Plc climbed four to 91 and Royal Dutch Shell Plc rose three to 60.

Total said it would take at least six months to drill an emergency well to stop escaping gases after a blowout on March 25, and Shell shut the neighboring Shearwater field to guard against explosion. BP’s credit rating was cut by Standard & Poor’s in 2010 as it took five months to drill a relief well to permanently plug the worst U.S. oil spill.

“While I don’t think there’s a risk they won’t pay, there is obviously a risk of less flexibility in their financial metrics and potential downgrade,” said Elisabeth Afseth, an analyst at Investec Bank Plc in London. “Some widening is clearly warranted but it’s very tricky to say what is the right amount and what is too much when nobody has any idea what is the scale of the incident.”

Deepwater Rig

Swaps on BP soared to 577 basis points from about 40 as oil leaked into the Gulf of Mexico for 87 days after an explosion on the Deepwater Horizon rig in April 2010 killed 11 workers. The contracts dropped to about 70 basis points by the end of that year.

Total surpassed BP today for the first time in two years. An increase signals deterioration in perceptions of credit quality.

“I expect, as with BP, that you may have consequences of a big incident like that but it’s not really going to affect their debt substantially,” Afseth said. “The oil companies have very strong cash flow, so they can take quite a lot.”

The cost of insuring corporate and financial debt in Europe also rose, according to BNP Paribas SA. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings rose 7.5 basis points to 587.5. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose three basis points to 120 basis points.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers rose six basis points to 208 and the subordinated index climbed 14 to 334.

A basis point on a credit-default swap protecting 10 million euros ($13.3 million) of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE