BP uncertainty is an opportunity for the brave

June 10, 2010

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.


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Did you see that oil soaked bird ??
that picture says it all and we in the US are pissed off about your lack of indifference and lies
go pollute your own coast and kill your own wildlife

Posted by lookatyou | Report as abusive

Since the past 52 days since the oil spill began, U.S. Military aircraft have killed 81 men, women and children in Pakistan. … and we’re worried about a few oily birds?

Posted by GRJensen | Report as abusive

Save the shores and the wildlife along with all the sealife in the precious oceans of our coastline, wetlands, and marshes. Do not worry about the friends and relatives of the Taliban or Al-Qaeda. Out planes use specfific commands to target the enemy. Both those seen and unseen.

We have yet to see the devastation to our food supply from this horrible leak that has no end in sight until it is finally sealed.

Posted by bigsnazzz | Report as abusive

Confiscation of assets in this case, unfortunately, borders on being a defacto declaration of war on Great Britain by the United States. This is why “multinational” corporations never should have been created in the first place. “Gutless Tony” and the clown from somewhere up in the Northern Countries (the chairman of the board?)are going to do a very pretty jig in the court of international law while Barry postures, Cheney hides, and the rest of us (normal people who just get the job done) have to pay “the bills that kill”. Already, individual states are taking matters into their own hands because the leaders of the countries immediately involved (U.S. & G.B.) are just now discovering how ineffective they really are in the arena of global corporate business.
Worse yet, the U.S. is highly culpable in this mess, due to the mind boggling shenanigans of the Minerals Management Service, which is probably why “Tricky Dick”
Cheney hasn’t had a lot to say recently. The only realistic way I see to prevent this sort of fiasco from happening regularly is to put the appropriate people on trial for malfeasance (I’m talking BP upper management here), and if found guilty, hang them as a warning to others in the corporate community. Don’t be so shocked, that’s what China does to get the message through, and apparently their message gets heard.

Thanks for this opportunity to express my opinion.

Mike McCurley
Grass Valley, California

Posted by grungymike | Report as abusive

[…] annual profits are in the $17 billion ballpark.   (Reuters recently reports that “Credit Suisse estimated BP’s share of the clean up tab to as much as $12 billion, taking Exxon Mobil’s Valdez spill in […]

Posted by to pay a price « orgtheory.net | Report as abusive