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2010-06-19 07:53:06
By BERNARD CONDON and MICHAEL LIEDTKE, AP Business Writers Thu Jun 17, 5:54
pm ET
NEW YORK BP holds enough oil in its reserves to single-handedly supply the
United States for two years. It has little debt for a company of its size and
makes more money than Apple and Google combined.
So when the White House arm-twisted its executives into setting aside $20
billion for the Gulf oil spill, investors weren't worried it would bankrupt BP.
They barely batted an eye.
"The U.S. government will become insolvent before BP does," said Bruce Lanni, a
stock analyst with Nollenberg Capital Partners.
Sure, BP stock has crumpled in half in a matter of weeks. Creditors are
demanding ever higher interest. But this time it's not some inscrutable,
high-flying Wall Street bank in trouble.
BP posted $17 billion in profit from its vast operations around the globe last
year, compared with $5.7 billion for Apple and $6.5 billion for Google. More
important, in the past three years the company generated $91 billion in cash
flow from operations.
It's not highly leveraged with debt, as banks were during the financial crisis.
And it has 18 billion barrels of oil in proven reserves, twice what the U.S.
consumes every year.
BP has spent about $1.8 billion on the spill so far, but that's the first drop
in a very large bucket. If BP faces criminal charges, for instance, it could
end up having to pay tens of billions in legal costs alone.
Analyst estimates of BP's total cost range from $17 billion to $60 billion. If
the worst predictions about the leak come true, that figure could surpass $100
billion, based on a Goldman Sachs estimate that each barrel of oil spilled
could wind up costing as much as $40,000 in cleanup and compensation.
Such a big bill, even at the lower end of the estimates, would drive many
companies under. But analysts said BP probably won't have to go to that extreme
unless it wants to wall off liabilities from the rest of its operations to
attract potential suitors.
Under Wednesday's deal with the Obama administration, BP will suspend its
dividend for the rest of 2010, freeing up $8 billion. The company also plans to
raise $10 billion from selling some assets. Add cash lying around in bank
accounts and in short-term investments and BP could raise $25 billion without
breaking much of a sweat.
What's more, BP is expected to generate $30 billion this year in operating cash
flow, assuming oil prices don't fall. Investors like to focus on this figure
because, unlike profits, it ignores costs for which money never changes hands,
like wear and tear on rigs.
Much of this operating cash has to be plowed back into the company, but some of
that spending $21 billion last year is discretionary and could be cut. On
Wednesday BP said it will trim planned outlays this year by $2 billion.
BP also has relatively little debt for a company of its size. That means it has
plenty of wiggle room to borrow. In fact, it already has lined up $10 billion
with banks if it needs it.
The caveat: If BP did need to issue bonds or take out a loan, it would have to
pay above-market interest rates because the risks posed by the oil spill have
tainted its credit rating.
Fear of the unknown has taken a toll on BP's stock.
With BP's deepwater well in the Gulf of Mexico still spewing oil two months
after it exploded, trying to guess how much the company will have to cough up
for cleanup and damages seems a fool's game.
And after watching other seemingly impregnable companies collapse over the past
two years, investors are not in the mood for much uncertainty.
"We are living in an era where there is no such thing as too big to fail," said
Stephen Leeb, president of the money manager Leeb Group. That specter, he said,
makes BP "very scary" to investors.
BP's agreement to the $20 billion fund and President Barack Obama's pledge
that the company is strong and should remain so seemed to calm investors a
bit. But they still fret about BP's total tab.
Video courtesy of ABC News. For more visit ABC News.com
Fresh estimates warn that as much as 2.5 million gallons of oil a day have been
leaking into the Gulf triple what scientists thought just a week ago. Worried
that BP is more likely now to stiff its lenders, Fitch Ratings recently knocked
BP's credit score down six notches to triple B.
BP's stock price has plunged 46 percent since the April 20 explosion, wiping
out $87 billion in shareholder wealth. It's more than most pessimistic stock
analysts expect the company will have to pay.
And that's got some of them quite animated.
"It's overdone," said Philip Adams of Gimme Credit. Fadel Gheit of Oppenheimer
& Co. captures BP's stock performance in one word: "Ridiculous."
Gheit predicts BP shares will hit $55 by the end of the next year, up nearly 75
percent from where it was trading Wednesday. Before the explosion, BP's stock
was at about $60, valuing the company at $187 billion.
But despite BP's enormous wealth, even bulls worry its stock might fall
further.
Among their concerns:
A sharp drop in oil prices.
Oil falling from $75 per barrel to $60 or $55 "would be far more destabilizing
to the company than any potential claim it might face in the Gulf,"
Oppenheimer's Gheit said. BP's annual cash flow fluctuates by $450 million for
every $1 change in oil, he estimated.
If oil prices fell, BP would be more likely to explore selling itself to Exxon
Mobil, Royal Dutch Shell or Chevron or at least divest its U.S. operations,
analysts said.
Washington could restrict BP in the U.S.
BP's willingness to set up a compensation fund seems to have converted Obama
into more of an ally than an antagonist. On Wednesday, the president called the
company "strong and viable," adding that it was "in all our interests that it
remain so."
But there's still a risk that political backlash could restrict BP's operations
in the U.S. and reduce its government contracts.
Though it operates in more than 80 countries, BP is heavily dependent on the
U.S. Forty percent of its assets are in the country, and the company is the
biggest energy provider to the U.S. military.
"If the government has a single-minded focus to be punitive, it could take this
company down," said Lawrence Goldstein, a director of the Energy Policy
Research Foundation.
Alex Morris of Raymond James said he expected politicians to be careful meting
out punishment because the dependency is mutual, given the country's oil
addiction.
"We're not going to ban them from the Gulf," he said, noting that BP is the
biggest producer there. "It's hard to imagine our politicians telling them to
pack their bags."
Hurricane trouble.
If BP doesn't plug the leak soon, it runs the risk that a big storm during
hurricane season will wash more oil ashore and add to damages, said Argus
Research analyst Phil Weiss.
For bulls on BP stock, the company's greatest asset may be time.
Cases involving major companies tend to drag on for years in the labyrinth of
the U.S. legal system, and the complexity and stakes involved in the Gulf spill
probably will lengthen the process even more. With more time to pay, BP can
stagger its costs instead of absorbing them all in a single financial blow.
"I would be stunned if all the criminal and civil cases against BP are wrapped
up before the end of this decade," said David Logan, dean of Roger Williams
University's School of Law in Rhode Island.
BP may be able to stretch out payments even longer, if the Exxon Valdez spill
is any measure. The tanker spilled 11 million gallons in Alaska in 1989, but it
took nearly two decades for the courts to determine what the company had to
pay.
Said Raymond James analyst Morris, "Anytime you have lawyers billable by the
hour, you know it's going to drag out."
___
Associated Press writers Harry Weber in Houston and Mark Williams in Columbus,
Ohio, contributed to this report. Liedtke reported from San Francisco.
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Posted: 2010463@486.87
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BP 'strong despite spill setback'
BP remains a "strong company" despite the "setback" it has suffered as a result
of the oil spill in the US Gulf of Mexico, its chairman says.
In an interview with Sky News, Carl-Henric Svanberg dismissed comments by
Russia's president that the oil giant may face "annihilation".
Mr Svanberg also confirmed that BP chief executive Tony Hayward would be
handing over the day-to-day response to BP managing director Bob Dudley.
The BP oil rig exploded on 20 April.
Eleven people died in the Deepwater Horizon drill rig accident, which left a
ruptured well spewing hundreds of thousands of barrels of oil into the Gulf of
Mexico.
Despite BP efforts to contain the leak, oil continues to enter the sea,
threatening states along the Gulf coast.
It has been described as the worst ecological disaster in the US.
A containment cap and another device are capturing some 25,000 barrels of oil a
day - the latest estimates suggest 35,000-60,000 barrels a day are spewing out.
Continue reading the main story
The company is strong, the company has strong underlying performance - strong
cash flow, strong operations
Carl-Henric Svanberg BP chairman Reaction to Congress hearing Guide to stopping
the oil
President Barack Obama has vowed to make BP pay for the damage.
The company has agreed to put aside $20bn ( 13.5bn) to compensate victims of
the oil spill - and has vowed to help with the clean-up.
On Friday, rating agency Moody's downgraded BP's credit rating by three
notches, following similar moves by the other two rating agencies earlier this
week.
It said the full costs of the oil spill would have a negative impact on the
company's cash flow for "a number of years".
Complacency charges
On Thursday, Tony Hayward faced an angry US Congressional panel which told him
BP had ignored dangers when drilling in the Gulf of Mexico.
House committee on energy and commerce chairman Henry Waxman said BP's
"complacency" before the rig explosion had been "astonishing".
He accused Mr Hayward of "stonewalling" for failing to answer his questions.
But Mr Svanberg defended the chief executive, saying the answers would have to
wait until a BP inquiry into what happened was completed.
Continue reading the main story BBC special coverage graphic
This week, the BBC is assessing the impact of the Louisiana oil spill.
Correspondents in the US, the Gulf of Mexico, Brazil, Nigeria and London are
reporting for the BBC World Service, World News TV and the BBC News website.
Full coverage of the oil disaster
Russian President Dmitry Medvedev said in an interview with the Wall Street
Journal on Thursday that BP had to pay "a lot of money this year".
"Whether the company can digest those expenditures, whether they will lead to
the annihilation of the company or its break up is a matter of expediency," Mr
Medvedev said.
But the BP chairman rejected his company was facing that prospect.
"The company is strong, the company has strong underlying performance - strong
cash flow, strong operations," Mr Svanberg said.
But he added that it was impossible to know the final cost of the spill until
it had been stopped.
BP says it will withhold dividends until the end of the year as part of its
response to the spill.
The long-term hope for ending the spill rests with two relief wells now being
drilled, one of which has reached two miles (3km) below the seabed, or about
two-thirds of the way to its target, US disaster co-ordinator Admiral Thad
Allen reported on Thursday.
BP plans to seal the leak with concrete but that is not likely to happen until
August at the earliest.