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BP CEO Considering Cutting Q2 Dividend As Oil Spill And Liability Estimates Double, Goldman Not Exuberant
Those recently popular trades to hedge BP dividends using options to create synthetic BP stock may prove prescient. The WSJ is reporting that the firm is now "considering cutting or deferring its second quarter dividend." The dividend is due to be announced on July 27, and BP’s board may cut it altogether, defer it, or pay all or part in scrip, effectively an IOU to investors, Hayward was quoted as saying." The news comes as Reuters announces that the daily flow rate from the spill is actually double previous estimates: "News that the flow rate may be as high 40,000 barrels (1.68 million gallons/6.36 million liters) per day -- twice as much as previously thought -- came after the U.S. market closed on Thursday." This is very bad news as it effectively doubles any accrued fines that the firm will ultimately have to pay: the new liability estimate now may be as high as $80 billion! And true to form, an administration official is there to pour some more fuel in the fire: "White House adviser David Axelrod dismissed complaints from BP about the U.S. government’s pressure, saying in an interview Hayward should “spend less time on hyperbole, and a lot more time on trying to solve the problem,” according to the Journal." In other news, in a research note released yesterday, Goldman's analyst della Vigna expressed a muted enthusiasm for the stock, nothing compared to JPM rabid support for BP stock at these levels.
From Goldman:
BP shares have fallen 12% this week, due to increased pressure on management from the US administration, however no material negative news came through in terms of the size or potential cost of the GoM spill. Additionally the riser cap is in place and appears to be capturing a significant amount of oil. BP shares have now fallen 42% since the accident, underperforming European integrated oils by 23%. This implies that the market is discounting c.US$33 bn of post-tax damages from the spill, equivalent to US$40-50 bn on a pre-tax basis, which is in the upper end of our estimated liability range. Given uncertainties remain, we still see superior risk/reward in Shell and Statoil, both Conviction Buy.
In our note BP: Incorporating potential GoM damages; down to Neutral published on June 7, 2010 we highlighted a conservative mid-case scenario of US$36 bn of damages, with a reasonable worst-case scenario of US$60-70 bn. On our estimates, BP shares now have as much upside potential as the rest of the European integrated oil sector (33%), assuming US$70 bn of damages and a 10% discount to the rest of the sector on EV/DACF, which suggests that the risk/reward is now tilted to the upside. However, uncertainty over the level of damages and on potential funding problems if a material amount of these liabilities mature within the next 12-24 months lead us to keep a Neutral rating on the stock.
Key risks to our view and price target include a failure in the relief well, a deeper cut to the dividend than we currently forecast and materially loweroil prices.
The problem is that new oil spill estimates could have a huge negative impact on the company due to fines which are a function of the actual spill rate:
U.S. scientists said on Thursday that between 20,000 and 40,000 barrels per day (840,000 and 1.7 million gallons/3.2 million and 6.4 million liters) of oil flowed from the well before June 3, when BP's remotely operated robots sawed through an underwater pipe to clear the way for a capping procedure.
That is twice the level of previously estimated -- although many experts had predicted a sharp increase in the estimate.
U.S. Interior Secretary Ken Salazar told a congressional panel on Wednesday that the cut itself may have increased the rate by a further 4 to 5 percent.
"CRISIS JUST BEGINNING"
Based on a rate of 40,000 barrels per day, the stricken well could have spewed as much as 2 million barrels (84 million gallons/317 million of liters) of oil since it ruptured on April 20 -- eight times the amount that the Exxon Valdez spilled into Prince William Sound in Alaska in 1989.
BP says it has collected 73,324 barrels (3.1 million gallons/11.7 million liters) of oil since installing the capping system.
"The latest estimates confirm that the BP Deepwater spill is the worst environmental disaster in U.S. history. Even if BP were to shut off the flow today, this crisis is just beginning," said John Hocevar, the Oceans Campaign Director for Greenpeace USA.
The new estimates, in which BP had no input, could have huge financial implications.
"Any EPA (Environmental Protection Agency) fines would be on a per barrel basis, so the new numbers would not be good for any company held responsible," said one oil analyst based in New York who declined to be named.
Under the Clean Water Act, BP and others could be exposed to fines up to $4,300 for every barrel leaked into the gulf, according to legal experts and official documents.
All this leads back to the debate taken up previously by Dylan Ratigan: is BP now trully TBTF? If the company's CDS are any indication, which are 75 bps tighter today to just over 400 bps, this could very well become the prevalent opinion quite soon.
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A TEAM 2010:
http://williambanzai7.blogspot.com/2010/06/team-2010.html
This oil leak just strikes home how inept government always has been. Beauracrcy and knee jerk reactions are a toxic sloth like mixture. And know we know all too well why their only response is to print money. And we entrust them to lead us to a recovery?
It will end up going down the same as path as BSC with JPM.
XOM will absorb BP for a $10 per share with its Liability backstopped by Uncle Sam.
BP just picked the "Go to Jail" card. They don't get to pass "Go" and collect their 200 dollars. They have called it "Monopoly" since 1935. How do you get to toss your money overboard to the lighters when you just rang up a bill of unknown but certainly huge proportion? Has all common sense been bargained away by the presumed acquiescence to the providers of entitlements on the Road to Serfdom? BP's credit card has a "hold" on it; what's so hard to understand? .....Or do they own the joint?
!
Some of the numbers being thrown around for BP's liability are just ridiculous. People are so used to seeing bailout size numbers that I think they have become blind to what things actually cost in the real world outside of high finance.
I saw one estimate at 400 billion dollars. You could do 3 Apollo space programs (at todays prices) for that kind of money and still get change. Or send every man woman and child in the world a check for $60.
There is no amount of money that can really clean it up. Oil will be in the swamps and bayous for generation or two now.
BP has just made this worse and worse, whoever is doing their PR is horrible.
My guess is that it is not bubbling up in "monkeyfaction"'s basement, backyard and workplace.
Post-explosion what they have been doing is criminal. I would say pre-explosion possibly criminal.
Either way if oil is still flowing say after the relief is drilled, then the company will be a zero very quickly. You are probably talking years to do a nuke option.
4 words: punitive damages, nondischargeable debt*
BP is already sunk. They're going to get woodshedded by hand picked juries (albeit likely in federal court, but in the states where the damage occurred). If the Plaintiffs can find a local defendant to stuff in the party, they can even bring state charges... which would make the likely awards probably go up 2-5x if I had to guess.
Remember, current permissible punitives are <10x compensatory damages for each case. Add to that fines via federal regs... and we're in the hundreds of billions easily... we're talking total loss of virtually all productive activity in the region. You also have to factor in the likelihood of further expansion, e.g. hurricanes, winds, currents, heat, the fact that it isn't capped yet, continued use of dispersants, etc.
Caveat alert *Not sure what BK laws will be applicable*
The problem is the company continues to lie about everything associate with the spill. The sharks are soon going to be circling, even if they are covered in crude.
The government should be making plans in case a nuke as to be use.
Goldman's analyst della Vigna expressed a muted enthusiasm for the stock,
correction: Goldman's analyst de la Vagina...
I agree etrader.Their only hope is to cap it within 2 weeks. I am wondering if a bk bankruptcy would be just a devastating as a Lehman failure or even more so. How can the counter parties possibly cover the failure of such a previously considered fortress like company?
coincidence that Cap & Trade bill coming up in the Senate and BP's motto is "Beyond Petroleum" .."there are no small coincidences or big coincidences just coincidences"
(global warming fell flat, so the carbon tax sceme needs this disaster- carbon tax sold as the new jobs creator & the savior of our debt crisis)
Dems fear november, as grid lock in DC becomes more likely with GOP wins...
Harry Reid says" Get er done."
BP will be protected as it is a means to an end.
will go long BP when down trend is broken..
maybe pick up out of the money leaps.
This story never stops getting worse. Anything is possible with this, from turning the Gulf into a massive deadzone to this thing gets capped next week and we all move on.
The problem in the GoM is a lot more serious than what BP and the USG has admitted.
This is becoming more obvious with each and every passing day.
The ocean has a way of telling you it just went dead.
BP to ZERO, Obama out of office will be the end result.
TBTF my arse.
Why won't the USA just seize all BP asstets? I know they want the oil. This would be alot easier than invading countries and harming innocent civies now wouldn't it?
"Goldman's analyst della Vigna expressed a muted enthusiasm for the stock, nothing compared to JPM rabid support for BP stock at these levels."
If these two sharks are touting it, short BP.
My bet is this takes down BP (to the point it gets acquired anyhow) and the Obama administration. You can only talk this shit up so much, soon, action is required.
Although in America in this day and age, the talk could go on for some time until people wake up. Perhaps when the slick reaches fuckin Manhattan, the government might get some attention from the citizenry.