BankruPt or Buy Pronto? BP at risk?

Please take a moment to remember the eleven crew members lost in the original explosion of the Deepwater Horizon.........  Their stories should not be forgotten in the horrible, yet hypnotically photogenic, damage to wildlife and the environment that the spill has created.

I recognize that it is eminently possible to question the wisdom of all deep water drilling, or to ask why BP or Transocean or Haliburton or Cameron International didn't prevent this blowout or have a better arsenal of fixes at the ready.  In visiting the BP site to gather data for this post, I also recognize a company that is taking responsibility for stopping the spill, cleaning it up and paying the damages – taking responsibility in the strongest terms  possible without committing legal suicide.  Maybe Beyond Petroleum was more marketing strategy than business plan, but, at least so far,  I'm seeing commitment on this one.

Turning to purely financial questions, recognize that we are working with data so incomplete it is like trying to predict the winner of the Superbowl, that would be the 2020 Superbowl.  The toughest variables are on the cost side.  Let's start with BP's number:

“Whilst difficult to accurately estimate, the cost to the Owners of the efforts to contain the spill and secure the well is currently estimated to be more than $6 Million per day.  This figure is rising as activity increases.  It is too early to quantify other potential costs and liabilities associated with the incident.”

OK, “whilst” reminds us that the B in BP is for British, but at least they used a few full stops (unlike those crazy Brit contracts).  $6 Million per day and rising might sound like a lot, especially since securing the well could take weeks, even months.  As we will see in a moment, to BP this is pocket change. The real issue here is other costs. “ontain” may cover burning, dispersal etc. but it does not seem to cover anything that happens after the oil hits the shore or any of the damages to fish, fishermen, etc. occurring at sea, or the cost of the rig itself, lost oil, compensation for deaths and injuries, etc.  Exxon paid about $4.3 Billion for the Exxon Valdez spill.  The Internet has estimates (British for guesses?) all over the lot, including Reuters quoting analysts to the effect that total cost could exceed $14 Billion – which seems to be near the high end of the reasoned public estimates, and close enough for our purposes.  By the way, the Steelers will win the 2020 Superbowl.

Who pays?  BP has a 25% partner, Andarko.  BP has insurance, but the insurer is owned by....BP.  Not much help there, although at least it's not AIG.  (BP may actually have a net saving after you allow for the cost of not litigating an insurer's environmental risk defense).  BP may well have valuable claims for contribution and indemnity against Transocean (rig operator), Cameron International (blow out prevention valve), Haliburton (well cementing).  These will likely depend on BP's ability to prove negligence or breach of warranty so  we will ignore them until more facts are in, noting only that BP has a plausible upside factor we are not counting.

The conclusion?  First, at $14 billion total cost, BP is not going bankrupt.  It's 75% share would be $10.5 billion.  As of March 31, 2010, BP had over $104 Billion in shareholder equity, over $69 Billion in current assets and over $6.8 billion in cash.  The spill may wipe out a good quarter's income, or even a little  more, but BP is not going away.  Good news for spill claimants and BP shareholders.  On April 28 BP ADR's closed over $57.  Tonight (6:30PM, May 4)  they are a little over $51.  Other things besides the spill are effecting share prices, but that  $6 decline in the BP share price equates to  to an $18.78 Billion decline in market cap, significantly more than BP's 75% share of estimated total spill cost, even before you allow for the hidden upside from co-defendant contribution or give BP management some credit for taking responsibility.  The big downside?  Remember, “estimate” is British for guess.

Photo Credit: GDS Digital