Experts Disagree On BP’s Potential Cash Liability
Monday, July 12, 2010
Here's a multibillion dollar question: How much cash will BP need to deal with the colossal oil spill in the Gulf? There's no consensus on this. BP says it has "significant flexibility" to deal with the financial fallout from the spill. But it has yet to seal the gushing well. And if BP is found guilty of a crime, the fines could reach many billions of dollars.
Will There Be Enough?
BP has at least one thing going for it.
"It is a spectacular cash-generating business," says Bill Mann, who manages a mutual fund for The Motley Fool.
Last year BP was the fourth most profitable company in the world. Its oil and gas businesses generated nearly $17 billion in profits.
BP's cash war chest now includes cash it has on hand, plus a huge line of credit. In all, BP has roughly $40 billion of cash it could theoretically access today.
But is that enough?
Mann says yes. He says there is no realistic scenario where BP will be strapped for cash — even if the cleanup and liabilities from the Gulf spill keep piling up.
But in mid-June, few investors took that view. At that point, BP's stock was in virtual free fall.
"The market seemed to believe that [BP] was really at risk of bankruptcy, and I don't think that they're there now," Mann says.
BP agreed to set aside $20 billion in a fund it would pay over several years. Even though that was not a cap, the move calmed investors. And Mann says he thinks BP won't end up paying much more than that.
However, Mann acknowledges there are significant X-factors. The relief wells could fail. Storms could spread oil farther. And the company could face serious criminal charges and penalties.
"I don't know where BP would possibly go to get a fair trial at this point," Mann says.
But even if the penalties far exceed his estimates, Mann says, the crucial thing is that BP won't have to come up with this money immediately.
"That's not happening in 2011, it's not happening in 2012," Mann says. "It'll be happening over decades."
Decades during which BP can make many more billions.
To Sell Or Not To Sell
But some predict BP will endure more fiscal pain. Higher-end estimates put BP's potential liabilities — for compensation, cleanup and penalties — far above $100 billion.
Last week, BP ruled out the possibility of raising more money by issuing more shares. But then, according to some reports, the company's CEO, Tony Hayward, met with business partners in Abu Dhabi and discussed selling a stake in BP.
That would essentially be the same thing as selling new shares, says Philip Weiss, an analyst with Argus Research.
"You can't just give somebody an ownership interest without giving them shares in exchange," he says.
Selling shares is a costly way for BP to raise more money, Weiss says. "It would be another slap in the face to the existing shareholder base."
BP already canceled dividend payments, at least for the rest of this year. And because BP has lost nearly half its market value since the April 20 accident, the company would essentially be selling itself now at a big discount.
Where To Go From Here
BP spokesman Mark Salt said Hayward was in the Middle East to meet with business partners, but Salt declined comment on the nature of those discussions.
Salt also said BP plans to raise $10 billion by selling assets over the next year — a move analysts say could diminish the company's future revenue.
And BP hopes it won't have to bear the costs alone. It asked minority lessees of the downed well — Anadarko and Mitsui — to pony up their share of the various costs.
Anadarko signaled it does not intend to pay. It says the explosion and spill are a result of BP's failures in drilling the well.
To view PDF documents, Download Acrobat Reader.