BP uncertainty is an opportunity for the brave
BP investors seem to have hit the panic button. The $76 billion drop in the UK oil major’s market value since the start of the Gulf of Mexico disaster looks out of proportion to the cost of the clean-up the bill. But then again, maybe not.
Of the total fall, $10 billion reflects the 13.5 percent drop in world stock markets since the April 20 explosion. That leaves a $67 billion hit to market capitalization.
The cost of the clean-up should account for one big chunk of that, with Credit Suisse putting BP’s share of the tab to as much as $12 billion, taking Exxon Mobil’s Valdez spill in 1989 as benchmark and including $4 billion of fines. Then there is the cost of paying damages to those whose livelihoods have been wrecked. That could easily cost another $12 billion. In theory, BP is on the hook for just 65 percent, but assume, for the sake of pessimism, that it pays for it all.
That still leaves $43 billion of value destruction to account for. Some of that may reflect investor panic, but there is other hard-to-quantify damage too. The biggest unknown is the government and regulatory response.
BP’s business in the United States accounts for 46 percent of the company’s value, according to Citigroup. Hereon, BP will have to have the highest safety standards in the industry. It may struggle for years to win new exploration licenses. And likely restrictions on deep-water exploration will hurt all drillers. Assume BP’s U.S. business has lost 25 percent of its pre-spill value. Adjusted for the wider stock-market drop, that would be another $17 billion destroyed.
That still leaves a $26 billion shortfall to explain. But other outstanding risks justify a further hit to the shares. One factor would be the continuing uncertainty around when the leak will be plugged, which makes the costs open-ended.
Analyst estimates of $4 billion in fines could prove hugely overoptimistic too. There is also the damaged management credibility reflecting poor handling of the crisis.
Finally, there is the outside risk of total bankruptcy. This looks far-fetched. At the end of the first quarter, BP had net debt of $25.1 billion and shareholders’ equity of $105 billion. Analysts predict about $35 billion of cash generation this year, and around $40 billion next. BP could spend $35 billion on the spill response and still afford its dividend and capital expenditure plans — without breaching its self-imposed gearing limit of 30 percent.
But the wildcard is the official investigation into the incident, which is likely to probe BP’s long-term safety record hard. This could conceivably in end the confiscation of assets.
Tot it all up, and allow a margin for error, and there may well be some upside — for the brave.