BP can avert cash crunch

June 17, 2010

BP says it has the financial firepower to tackle the Gulf of Mexico spill. But its resources are finite and the well is still spewing. Investors are wondering if the money could stop flowing before the oil does. The numbers are reassuring.

There is still huge uncertainty as to how much the ongoing disaster will cost. But BP’s agreement to suspend dividends and put $20 billion in escrow for damages helps clarify the potential impact on its cash position. Crucially, the liability is spread over time. Even on a gloomy scenario, it looks like the UK oil major would avoid a crunch.

First, assume the well isn’t capped until December, four months later than schedule. BP expects to have sunk the first
of two relief wells by the beginning of August. But hurricanes could delay this. Next, assume that 80,000 barrels of oil have been gushing daily into the ocean since the beginning of June — a third more than the top of the official estimated range.

Also assume BP can capture only about 75 percent of that oil, down from the 90 percent some analysts have pencilled in. Finally, double the current cleanup cost to an average of $60 million per day, scrap any tax deductibility and make BP liable for the whole cost, even though it part-owns the well.

This would generate a bill of $14 billion this year for clean-up costs, with fines of $22 billion under the U.S. Clean
Water Act. Exxon had two years to pay its fines for the Valdez spill, but a cautious investor would assume BP might
have to pay half the fines in 2010. On top, there would be the $5 billion BP is putting into escrow this year. In 2011, there would be the balance of the fines, and another $15 billion over three years in the escrow account. In total, a bill of nearly $56 billion, with over half due in 2010.

Offsetting this, BP is set to generate about $32 billion in cashflow this year, and $34 billion the next. After reducing
capex, suspending the dividend and accelerating asset sales it would still need to raise about $22 billion this year to close the gap. That would take its gearing to the top of its 20 to 30 percent target range. Could BP borrow in such circumstances? The company’s $15 billion committed bank lines wouldn’t be quite enough. But it is hard to see the banks freezing out a company with such prodigious cashflow.

There may be criminal fines too. But establishing criminal liability will take time, and the penalties would come later. For BP to really be at risk near-term, there would have to be a nasty combination of events — a much bigger spill, a collapse in the oil price hitting cashflows and another financial shock that sees corporate credit rationed so heavily that BP is cut off. Not unthinkable — but still unlikely.

Comments

“Offsetting this, BP is set to generate about $32 billion in cashflow this year, and $34 billion the next.”

Is this figure before boycotts and stock dumping?

Posted by Maxwells | Report as abusive
 

B eyond P ollution is Disaster !

Posted by TallGha | Report as abusive
 

Wrong again. Think Texaco.

Posted by user4301 | Report as abusive
 

So far all I hear is reference to BP being liable for all the costs of fixing the leak, cleaning up the environment and paying compensation and fines.
There are others involved with this issue who have been quietly standing in the background allowing BP to take all the flack. They too have a culpable liability in this disaster. They will have been party to the profits and or been highly paid for their work and participation.
No one has mentioned their balance sheets and ability to pay their element of the costs. Will they be able to pay or will they go bankrupt?
I have not even heard any reference to them attending and being quized by the Senate review of the accident.
Is this an issue of keep your heads down lads and they they miss us!

Posted by GROCK | Report as abusive
 

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