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CS Sees Total BP Oil Spill Cost Up To $37 Billion, To Eat Up 3 Years Of Free Cash Flow, Will Require 10% Rise In Gearing

Submitted by Tyler Durden on 06/02/2010 09:14 -0400

Credit Suisse

Some more bad news to BP, and to all those chattering heads that due to BPs tens of billions in cash, any cleanup costs are just a drop in the bucket. Credit Suisse has just come out with a new estimate of total clean up costs and liabilities to BP: the Swiss firm sees BP paying between $15 and $23 billion in clean up costs plus $14 billion of claims. The punchline: "This would absorb 3 years of BP’s free cashflow after dividends and capex (at $80/bbl oil) and require a 10% rise in gearing; raising dividend risk." Maybe all those who are looking to jump into BP stock should consider waiting just a little longer...

From the CS report:

While the path of clean up costs and liabilities remains uncertain, this note includes analysis of the current run rate of activity and costs to suggest a framework for both cleanup costs and claims.

Skimming is providing a partial offset but hurricane risk is rising

Clearly, BP will want to fight this battle offshore. Based on BP's data, there are now 1,600 vessels currently involved in the surface operation (up from 1,100 two weeks ago). BP has skimmed some 321,000 barrels so far. This is equivalent to around 18% of the Macondo spill based on a skimming efficiency of 40%. At an 18% capture rate, skimming should reduce the shore clean up costs by around $4bn over 90 days. Skimming will continue for as long as practicable. Capturing oil using the LMRP should also help reduce the clean-up costs, if successful. Some 700 miles of protective boom have been deployed. However, without a permanent solution, we note that much of these spill mitigation efforts are vulnerable to hurricanes – booms and skimmers only work in calm water.

Cost run rate suggests our c.$16bn clean-up cost estimate would last approximately one year

In this short note, we have created a table of the operational metrics and cost run rate of the response from information released on BP's website. So far $990m has been spent (including claims and grants to the affected states), with a further $500m pledged for research into the impact of the spill. At the most recent cost run rate for clean-up alone of between $14-30m per day, BP would spend around $11-17bn over 12 months.

However, unless the flow of oil is curtailed (via LMRP or otherwise) we believe the cost run rate will rise for 3 reasons (1) more skimmers will be required (2) as more oil hits shore, the number of personnel involved will rise from its current level of 22,000, and (3) there will be further costs for onshore clean-up equipment. Currently, we believe our revised $16bn clean-up cost estimate would last approximately one year. Based on potential spill volumes compared with ExxonValdez, the clean-up costs could be anywhere between $15-23bn over several years.

Three containment options could reduce this potential liability and offer hurricane solution

BP is working on three separate containment options (1) the LMRP cap, which will aim to capture flowing oil and its efficiency will depend on the seal with the cut riser, (2) reversing the flow via the top-kill manifold and importantly (3) an "overshot tool" with a separate floating riser that can quickly be released and re-connected in the event of a hurricane. Given the limited success thus far, confidence in these solutions will be low until proven otherwise. However, were these containment solutions to work, the amount spilt would be capped at around 35million gallons (3x ExxonValdez) and potentially capping clean up costs in the $13bn range.

Risk of dividend cut is rising

On our $80 oil price assumption, we forecast annual free cash flow of $6bn on average over 2010-13 after capex of $21.5bn and dividends of $10.5bn. We have included $15.6bn of clean-up costs in the P&L (which should be tax deductible) and $14.4bn of claims liabilities in the cash flow statement. Taken together, this $30bn pre-tax outgoing is some $13bn higher than our previously published forecasts of clean-up costs and claims liabilities in our 28-May note (“Top Kill Ongoing, Liabilities to Rise”), an increase that is equivalent to 10% of BP's market cap. Based on these numbers and a $80/bbl oil price, BP’s gearing (net debt to equity) should still actually fall from 25.9% at end-2009 to 23% at end-2013, providing some headroom in the event clean-up costs and/or claims are higher than our assumptions, but dividend risks are clearly rising. We note that our balance sheet forecasts exclude any punitive damages which would require gross negligence to be proven.

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Wed, 06/02/2010 - 09:27 | 389124 emsolý

given the time lag until all of this is settled and the possibility of hyperinflation in the meantime, this amount is not even astoundingly high, methinks.

or is this in terms of constant-dollars / present-value (which would make it economically more meaningful)?

Wed, 06/02/2010 - 09:30 | 389141 Sudden Debt

Tyler, what do you think the future insurance fees would be to insure a rig against something like this? 5% fee?

Wed, 06/02/2010 - 09:39 | 389158 lsbumblebee

Here's a very interesting article regarding this disaster:

http://rense.com/general90/analy.htm

Wed, 06/02/2010 - 11:14 | 389372 Votewithabullet

This is assuming $80 oil. What happens when it goes to $150?

Wed, 06/02/2010 - 09:40 | 389159 101 years and c...

This is assuming $80 oil. How bad will it be when oil falls below $40 later this year?

Wed, 06/02/2010 - 09:46 | 389171 silvertrain

production will be cut long before it hits $40

Wed, 06/02/2010 - 10:00 | 389216 trav7777

That ain't gonna happen if we close off the exploration of the ONLY area on the planet that has produced fields in the 500kbpd production range in the past 10 years.

The side effect of this is that energy prices will cost more. Deepwater was a great idea until something went very wrong with it.

On the flipside, PBR is still going ahead with Tupi and Carioca (to the extent possible).

This is the only place that undeveloped oil fields EXIST anymore.

Wed, 06/02/2010 - 09:42 | 389163 demsco

Exxon took 9 years to litigate. BP will take 20 years. Just saying. Plus, RIG and HAL have some liability as well.

Wed, 06/02/2010 - 09:45 | 389167 Sudden Debt

the drillers will be forced to pay such high insurance fees to cover any future possible spills that they won't be able to make a profit anymore unless oil doubles from here on.

Short these drillers as long as the smoke still confuses some longs ;)

Wed, 06/02/2010 - 09:48 | 389172 MsCreant

Remeber when Citi bank and some others went below a buck and some folks picked it up and it rose to three dollars and something pretty quick when the government bailed them out? This was like a little elevator for a while, jump on in the basement, bail out, going up? I am wondering about BP in this way. TBTF, though it is an absolute failure. Zombie oil company.

Wed, 06/02/2010 - 09:56 | 389186 Sudden Debt

bailing out a foreign oil company while you have enough American oil companies willing to take over their fields to make sure English pensions don't take a hit...

Somehow...

Somehow I think Obama would have a hard time selling that to the taxpayers. "Let's bailout a foreign country and let's pay more taxes so grumpy old English men get their full pensions!"

Maybe it sounds better if it's writting with oil on posterpaper of uncut 100$ dollar bills straight from the presses.

Wed, 06/02/2010 - 09:49 | 389182 williambanzai7

GULF ZILLA 2010:

http://williambanzai7.blogspot.com/2010/06/gulfzilla-2010.html

Wed, 06/02/2010 - 09:52 | 389188 belogical

I don't think that is nearly enoough. Clean up is one thing. Lost livelihoods and decreased property value not to mention the end of tourism in the gulf for 20-30 years

Wed, 06/02/2010 - 09:59 | 389209 Sudden Debt

I bet there are still people doing cititrips to Detroit also, so there will always be idiots going to the gom, even if it's all covered with oil. :)

Wed, 06/02/2010 - 10:00 | 389210 Sudden Debt

double post

Wed, 06/02/2010 - 09:58 | 389202 dumpster

BP will begain to settle in 2020 .. 9 years to go through the courts and then appeal.. alaska still waiting lol

Wed, 06/02/2010 - 09:58 | 389203 Tigers Wood

June 2 (Bloomberg) -- BP Plc’s failure since April to plug a Gulf of Mexico oil leak has prompted forecasts the crude may continue gushing into December in what President Barack Obama has called the greatest environmental disaster in U.S. history.

“The worst-case scenario is Christmas time,” Dan Pickering, the head of research at energy investor Tudor Pickering Holt & Co. in Houston, said. “This process is teaching us to be skeptical of deadlines.”

Ending the year with a still-gushing well would mean about 4 million barrels of oil spilled into the Gulf, based on the government’s current estimate of 12,000 to 19,000 barrels leaking a day. That would wipe out marine life deep at sea near the leak and elsewhere in the Gulf, and along hundreds of miles of coastline, said Harry Roberts, a professor of Coastal Studies at Louisiana State University.

Wed, 06/02/2010 - 09:59 | 389208 dumpster

really intellegent post ,,, are you johnny Bravo LOL

Wed, 06/02/2010 - 09:59 | 389213 Cursive

The problem with any analysis of a this disaster is that it is really just a guess. There are too many variables to have any confidence in the outcome. I prefer to focus on the risk factors rather than trying to quantify them. And the biggest risk factor is that the use of the Corexit dispersant and resulting submarine oil lakes has created an even bigger environmental hazard. If true and to the proportions that some researchers have estimated, BP will not have the cash to cover the cost of that clean-up.

Wed, 06/02/2010 - 10:11 | 389238 dumpster

so another guess ... to many variables lol

Wed, 06/02/2010 - 10:17 | 389254 Mad Max

The $14B of claims is a joke. There will be well over a $trillion in claims before it's all over. Of course it probably will be in litigation for 10+ years (25+?) or until the US ceases to exist, whichever comes first. This will obliterate whichever company is found to be most at fault, and at this time that looks like it will be BP.

This is by far the worst oil spill disaster in the history of the west, and probably the world. While not directly causing as many human deaths, it probably will ultimately be as destructive if not worse than Chernobyl. And all because of cheap, stupid corner-cutting on a drill rig.

Wed, 06/02/2010 - 10:46 | 389276 Yes We Can. But...

What about loss of future business?

BP blew it in the biggest way. I'm done buying anything from these a-holes, and I'm not alone. Trash the planet, get trashed. BP will face a massive, intense, hardcore boycott. BP will apologize, beg forgiveness, re-brand, beg boycotters to not hurt their innocent retailers, will try to move product through other outlets, but will by stymied by the information super-highway and by consumer anger. Boycotts tend not to have much impact, but this one could be different.

Wed, 06/02/2010 - 11:03 | 389354 E pluribus unum

+ 1

Wed, 06/02/2010 - 11:11 | 389367 Leo Kolivakis

I openly question whether these figures are GROSSLY inflated to scare people away so hedge funds can load up on BP.

Wed, 06/02/2010 - 11:34 | 389418 Mad Max

Do what you want, Leo, but I wouldn't hire a pension advisor who was loading up on BP right now!

Ultimate damages from this disaster will be incredible.

The only real question in my mind is whether the government protects BP and allows them to get away with murder by stifling any real tort claims against them.

Wed, 06/02/2010 - 11:12 | 389369 Miramanee

This is a non-issue. The conveyor belt of wealth---creating trillions of fiat dollars in the short term, and conveying those dollars toward the center and away from the periphery---will 'bail out' BP just as it has bailed out Wall Street and Southern Europe. When all the fiat dollars go POOF!, it will no longer matter. The real wealth will be concentrated in the Kings and Queens of the post-modern world...and the rest of us will eat shit for the remainder of our days.

Wed, 06/02/2010 - 11:14 | 389373 MachoMan

I'm sorry, but I completely disagree with the current assessment of potential damages.

First, when this matter goes to Court (and it has/will), this is a case seemingly ripe for punitive damages. The fingerpointing will begin and public sentiment is strong. As it stands, the general rule of thumb is that any punitive damage award, which is less than 2 digit multiples of the compensatory damage, is acceptable and will likely not be overturned on appeal. That would put the potential real world, practical damages in the ~$300b+ range.

Second, the spill has not been capped and many are reporting the spill rate has been sandbagged. In other words, don't count your chickens. With the likelihood the spill will increase its sphere of influence (ocean currents, wind, hurricanes, etc.), the damage assessment is also likely sandbagged.

Third, and in furtherance of the first point, as a practical matter, juries are going to take BP, et al, to the woodshed. I sincerely doubt this matter is going to be a large class action. Simply put, the damages are too diverse in nature to certify the class. Further, while the various cases will be consolidated into a central court for judicial efficiency, no attorney worth his salt is going to waive venue and have trial in a centrally located court. Rather, these cases are going to be in front of hand picked, homegrown juries... In the end, BP, et al, will kick themselves for not settling early, I promise.

Last, I also find it incredibly likely that BP, et al, will in no way be limited to $75m in damages... where there is a will, there is a way to pull them under. There will be an exception found.

Wed, 06/02/2010 - 14:06 | 389930 seventree

Comparing this to Valdez, or even calling it a "spill" is risks seriously understating potential problems. This is not just a big oil slick floating on the surface. Despite all the claims and denials, no one really knows to what degree Gulf water has been contaminated by intermixing -- an effect further complicated by huge amounts of dispersant chemicals. It is premature to talk about cleanup costs when we don't even know to what extent cleanup is humanly possible.

Wed, 06/02/2010 - 16:33 | 390327 Grand Supercycle

Is something looking bullish ?

http://stockmarket618.wordpress.com

http://www.zerohedge.com/forum/latest-market-outlook-1

Wed, 06/02/2010 - 17:38 | 390463 Remington IV

Exxon kept their liabilities tied up in court for 19 years and had them lowered 3 times

BP will do the same

CS Sees Total BP Oil Spill Cost Up To $37 Billion, To Eat Up 3 Years Of Free Cash Flow, Will Require 10% Rise In Gearing

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