| Apart from the extreme headline risk British Petroleum faces:
There are very real potential and actual fundamental challenges
facing it as well as its contracted partner, APC.
In order to estimate the probability of bankruptcy of BP and APC, we
built three scenarios in which we have estimated the costs from the
spill in Gulf of Mexico. While the cleanup costs are thus far being
completely borne by BP (owning 65% and the current operator of the
leaking well), the share of losses of APC (owning 25% in the leaking
well) and Mitsui (owning 10%) will arise when BP contests for loss
sharing in the courts. Since APC and Mitsui are only the financial
owners with no strategic and operating interests in the leaking well,
legal experts are giving a strong possibility that APC and Mitsui might
escape most of the spill costs if it is proven that the explosion was
largely owing to the negligence on the part of BP. Thus, for this
initial qualitative portion of our analysis we assume the entire costs
currently being borne by BP.
We have built three scenarios with varying assumptions about the flow
rate and capture rate of the containment ships to arrive at the amount
of oil that will be released till August 1, 2010 (scheduled date for
completion of relief wells). Please note that the flow rate and capture
rate assumptions are on the basis of the latest reported figures by
government scientists and BP (who has a perverse incentive and
conflicted interests). The actual flow rate and the capture rate are
still uncertain. The average cleaning costs per barrel and the
litigation and punitive damages estimates are based on analyst
estimates.
The total estimated spill cost is $40.5 billion, $73.9 billion and
$107.2 billion under optimistic, base and adverse case, respectively.
The amount of losses already discounted in the prices is nearly $67.9
billion (not taking into consideration the very recent pop in the stock
price) which is the difference between the current market cap and the
market cap based on fair value per share using peer average 2011e P/E
multiple.
We modeled the estimated spill costs in the projected cash flow
position of BP over the next four years and it is observed that although
the spill costs will result in excessive liquidity pressures in 2010
forcing BP to cut down on dividend and capex and raising fresh debt, the
possibility of bankruptcy will arise only if BP is not provided the
required funds. It should also be noted that it is our understanding
that bankruptcy will probably not expunge BP’s liabilities in regards to
cleaning and rehabilitating the environment damaged by the spill.
Based on the cash flow projections in which we have assumed
cancellation of dividend in 2010 and cut down of capex by 50%, the
total free cash flows in 2010 under Base case and Adverse case are
-$40.4 billion and -$70.9 billion. Apart from any new debt
requirements, BP also will need funds to refinance its maturing debt of
nearly $1.3 billion and $6.0 billion in 2010 and 2011, respectively.
BP has credit facilities of nearly $5 billion.
Thus, the survival of BP will primarily depend on availability of
funds from the market (and barring a significant blowup stemming from
the expanding Sovereign
Debt Crisis) and the uncertainty around the spill costs will make
the funding difficult.
Financial Analysis
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All figures in $ billion except per share data
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Spill cost estimates (in $ billion) under each case
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Optimistic case
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Base Case
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Adverse Case
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Clean up costs
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xxx
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xxx
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58.3
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Fines under Clean water Act
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xxx
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xxx
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26.4
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Compensatory
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xxx
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xxx
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6.7
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Punitive
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xxx
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xxx
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19.6
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Other compensatory and punitive damages
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xxx
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xxx
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22.5
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Compensatory
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xxx
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xxx
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11.3
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Punitive
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xxx
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xxx
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11.3
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Total spill costs
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xxx
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xxx
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107.2
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All figures in $ billion except per share data
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Estimated Spill costs
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Total estimated spill costs
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BP’s liability
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APC’s liability
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Mitsui’s liability
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Base Case
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xxx
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xxx
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xxx
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xxx
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Adverse case
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107.2
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80.5
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19.1
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7.6
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Optimistic case
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xxx
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xxx
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xxx
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xx
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Related Video
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 00:27
 06:37 |
BP and APC Solvency Analysis – Retail
In the likely event that this ends up spilling 100 million + barrels, at a fine of $4300/barrel assuming misdemeanor criminal negligence (which is probably going to happen), BP is already done. I can't believe there are people on the bull side of this equity.
Based on my experience as an attorney in the energy business, I think BP will need a lot of luck to avoid being stripped bare.
Back of envelope: Valdez untimately came in at $16,000 a barrel, considering clean up, settlements, fines, penalties, internal costs, etc. That was in sheltered, rocky coast, relatively uninhabited waters.
And, Exxon got to skate on the punitive damages, because their guy had just been taking a little snooze following a couple of cocktails.
BP is so over.
Those EURUSD bullish warnings have
strengthened further today.
Vice versa for the USD index of course.
It seems the current EURUSD downleg has ended.
http://stockmarket618.wordpress.com
MR. REGGIE,
yes me again , n still waiting for your reply....would be great to learn,,,,
n mr. cheeky,,,i had asked ur opinon on few things last time in ur future chart,,but never got a reply.,..would luv to hear frm u,,,
as for this analysis.....how come no one is talkin about the price of oil...the impact of changing oil prices will sure effect how much they (BP) can afford to pay ...
mr cheeky, how come their stock is worth less...how come citi, boa, r too big to fail for us n y wouldn;t it be the same for BP...sometimes...even though m a novice,,,i do believe the numbers won't say it all...
Your August 1 date of relief wells is optimistic...
"* BP is ahead of schedule in drilling a relief well to kill its blown-out Macondo well, the top U.S. spill official said on Thursday. It is still expected to be completed at some point in August."
http://www.reuters.com/article/idAFN1721929520100617?rpc=44
Beyond that, I agree with others that the relief wells may not solve the issue. We'll see if Simmons and others have it right that relief wells will help slow the leak, but not solve it. I hope it can be capped for the sake of the US and the GOM. However, I am guessing the 'rumors' are right and that BP and our Gov't have been lying to us as to the magnitude of the problem. Remember 1K, 5K... 60K. Simmons is guessing it is 120K.
Time will tell...
Why worry about the availability of funds from the market? Isn't BP going to be another TBTF? Then freshly printed Fiatcos will do.
This is the new miracle-economy : a TBTF messes up with an entire population's ' livelihood and a few hours running the printing presses will "solve" the problem.
The most likely case IMO is the well can't be capped and the relief wells are unsuccessful. Without any casing and 15000 PSI bottom hole pressure, the multiple direct leaks from the reservoir will leak several hundred million barrels over the next several years. If the relief well fails to cap the blowout, BP with its multiple legal entities will abandon BP America for a $30+ billion loss and leave the USA will hundreds of billions, perhaps a trillion dollar of losses. BP's $20 billion will be funded by borrowing against existing BP America assets. GS/Blackrock have been hired to protect BP Corporate from the worse case but likely scenario. This blowout will cut the DJIA in half . Its another subprime disaster. Its a big deal for the USA not just BP
Relief wells are not going to fix a damned thing..........(if the fissure leaks are a fact).
We are possibly screwed, they are said to be multiple fissure leaks, growing larger by the day.
Money will be the least of our concerns (BP is DOA).
With already an estimated LAKE of underwater oil, up to 40% of the size of the ENTIRE GOM, already...........estimates as high as 160k barrels a day are estimated to be spewing into the Gulf.
IF TRUE,to be blunt.............we're screwed, and this shit is going to move with the currents...........depending on the size of this oil fields reserves,( heard that it goes all the way to Nicaraugua).
The possiblity of polluting millions of sq miles of ocean is very high.
Not to mention other countries coastlines,fishing, business, tourism...........
What I want to know, is WHY his HIGHNESS, turned down all sorts of help............GWB bypassed the Jones Act on Katrina.
Obama is absolutley drunk with power of the office, so why did HE not do the same?.
He never met /made up an EO he would not use.
Seems ANY leader, that gave a shit about this disaster, would not turn down ANY offers of help...................
A gargantuan nightmare, is being used as a POLITICAL TOOL..........for Cap & Tax.
Nothing matters but the Agenda..............NOTHING.
Go long Bankruptcy Lawyers. Can't Lord Blankfein find a way to package a thousand B/R lawyers and securitize them for us?
BP is too connected. I cannot imagine that the criminals who run the country would ever let one of their brethren fall.
Imagine the hilarity in the British Parliament when the bailout is debated. If only those pelicans and 'small people' were, say, Nigerian this whole thing could be ignored.
I hope people around the Gulf Coast get as much as they can out of this, and buy gold with it! I hope Mary Landrieu finds the intestinal fortitude to support a solid Senate energy bill in exchange for her demand to move up state royalty payouts. She seems so gutless and venal it's hard to imagine, but dare to dream....
What if they don't stop the leak anytime soon? At a mile under the sea I think you have to consider the fact that a doomsday scenario may occur for them. Again, what if this thing leaks until late 2011. I'm not convinced "relief wells" will be efective immediately.
No 'them' about it...this is definitely an 'us' situation, as in all 6,827,837,711.
It is hard to imagine any sort of limit on BP exposure to lawsuits on this. There are a multitude of vectors for liability. A few people start getting sick in an affected area, and out come the class action lawsuits. Anyone who gets sick for any reason in an affected area blames BP. The illness has vague symptoms . . . listlessness, disorientation, achiness and blurred vision. This new illness is given a name like Poisoned Gulf syndrome. Then not only people living in affected areas have the symptoms, but people in nearby areas.Lawyers decide that anyone within 500 miles of an affected area could be affected by the PGS.
When you mess up as bad as BP has in this case, I see the potential for litigation to be infinite.
Or....they could give genuine cancers to actual people from the Gulf Coast.
I see the devastation to be well beyond the means of even a monstrous petrol company to pay; litigation is only as infinite as the depth of the target's pocket.
Snowball,
You are right, and I did not mean to imply that there would NOT be real health issues. Just that even after you compensated people with real issues, everyone else sees the honey pot, and goes after their share.
Real and imagined health issues alone would be enough to break the company, not to mention all the other liability vectors.
So bull run on BP shares? :)
No. Bonds. Trust me on this one. Buy BP bonds if you have the necessary capital to allocate. If it goes BK you can hawk your bond to a CDS buyer [of course with a 10% premium] or just claim assets. BP stock is practically worthless, but bonds could net you a small fortune.
Woa woa woa hold the phone here Cheeky. You're saying a company that is going to be on the hook for north of 100 billion dollars is giong to have ANYTHING left? The only people who are going to come out of this with anything are the employs who cash the checks up until they don't cash any more. Plus whatever the CEO, CFO etc can squirrel away in the Caymans.
The common stock holders are going to get wiped. The prefered are going to get wiped. The bond holders are going to get wiped.
At the right price.....