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
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.