Tags: BP | Tough | Future | Oil | Spill

Scenario: BP Faces Tough Future After Oil Spill

Wednesday, 16 Jun 2010 02:39 PM

 

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BP has come under increasing pressure in recent weeks, as estimates of the volume of oil leaking from its Gulf of Mexico well have risen and politicians blame corner-cutting for the accident.

Reuters looked at possible scenarios for BP earlier this month. The following is an updated look at what might be in store for the London-based oil major, whose shares now stand 45 percent below the pre-blow out levels.

BP RUNS OUT OF CASH — UNLIKELY

BP says it has spent $1.6 billion so far to cap the leaking well and clean up the spill and estimated last week it would spend $3-$6 billion in total this year.

The company generated cash of $7.7 billion from operating activities in the first quarter. Even after capital investment of $3.8 billion, it had $3.9 billion of free cash and the company says it has arranged significant credit lines.

Compensation to those affected by the spill has risen to $62 million but could grow sharply as President Barack Obama wants BP to establish an independent fund to pay damages.

The annual economic loss of tourism and fishing revenues in the states of Alabama, Louisiana and Mississippi could result in claims as high as $10.3 billion, while a reduction of one third in Florida's tourism industry could add another $12 billion to the bill, analysts at Citigroup said.

BP's partners in the well, Anadarko Petroleum and Japan's Mitusi, have not said whether they will help with compensation. They are legally bound to pay on the basis of their 25 percent and 10 percent respective stakes in the field.

The upper end of analysts' forecasts of total costs is around $30-$35 billion, with potential extra costs for lost fisheries business in years to come.

Analysts say BP may not be able to cover such costs, and pay its dividend, out of cashflow alone, forcing additional borrowing.

However, the oil giant is believed to be able to do so without bringing its gearing levels above its targeted 20-30 percent range.

One key risk is that the Administration has said it wants BP to compensate those workers laid off due to the moratorium on deepwater drilling imposed in the wake of the accident -- a cost BP thinks it should not have to pay.

So far few, if any, workers have been laid off as oil companies have, with a few exceptions including Anadarko, have not invoked force majeure clauses that allow them cancel rig contracts.

Analysts at Raymond James & Associates said in a report on Monday that about 49,500 direct jobs are at risk from the moratorium.

BP BECOMES A TAKEOVER TARGET — UNLIKELY

Speculation that BP could become a takeover target has been heightened in recent days by news the company had hired investment bank Goldman Sachs as an adviser.

Exxon Mobil, Royal Dutch Shell, Chevron and France's Total are the only fully publicly traded oil companies larger than BP and deemed financially strong enough to buy it.

Total's Chief Executive Christophe de Margerie said it would be "unethical" to make an approach and analysts think the CEOs of the other companies would also be reluctant to bid.

Regulators could force the sale of U.S. refineries into an uncertain market for such assets and the sale of valuable U.S. gas fields, threatening the upside of a deal.

However, the biggest deterrent is the open-ended nature of BP's liabilities. A potential suitor would also fear reputational contamination, analysts said.

A takeover by a state-backed entity like one of the Chinese oil companies is inconceivable, analysts said, as BP is the U.S.'s biggest oil producer and given the blocking of the sale of U.S. listed and Asia-focused Unocal to a Chinese company.

CEO HAYWARD LOSES HIS JOB — UNLIKELY, FOR NOW

Tony Hayward has been a target for highly personal attacks in the United States over some poorly chosen comments. Obama said he would fire Hayward if the CEO worked for him.

Analysts and investors have been kinder, taking the view that the accident reflects the intrinsically risky nature of oil exploration. They say BP has done all that could be done to stem the leak and to compensate those affected.

BP's Chairman, Carl-Henric Svanberg has also backed Hayward.

However, this support could begin to unravel if accusations by U.S. lawmakers — that BP took shortcuts when drilling the blown out well — stick.

Hayward took up his role promising to standardize and streamline the way BP builds facilities and drills oil wells. If the structures he put in place appear to have led to decisions that contributed to the accident, the CEO's position could come under pressure.

The CEOs of Chevron and Exxon implicitly criticized BP's practices in testimony to a congressional hearing on Tuesday.

Bookmaker Paddy Power is offering odds on Hayward's departure by Dec. 31 that suggest punters think it is more likely the CEO will go.

CHAIRMAN LOSES HIS JOB — UNLIKELY, FOR NOW

Svanberg has been criticized by investors and several British newspapers for his low profile in the response effort.

His behavior has been contrasted with the high-profile approach taken by predecessor Peter Sutherland, nicknamed by Hayward as BP's "tank," when forcing former CEO John Browne to name a retirement date and defending BP's Russian interests in a dispute with Russian partners.

BP says it was a deliberate strategy to make Hayward the public face of the company to avoid confusing the public.

But other executives, including Americas Director Bob Dudley and U.S. Chief Operating Officer Doug Suttles — both Americans — have also fronted the response operation in TV interviews.

Critics say Svanberg's low profile reflects his lack of high-level experience of the United States and his personality.

But BP found it difficult to replace Sutherland so investors may be reluctant to embark on another chairman hunt with Svanberg in the job less than a year.

The chairman meets Obama on Wednesday to discuss proposals to create an independent fund for compensating those affected. A polished performance from the former CEO of Sweden's Ericsson could help solidify his position.

BP TO LOSE GOVERNMENT CONTRACTS — LIKELY, BUT IMPACT MINOR

Under federal law BP would be banned from government contracts for a period if convicted of a criminal offense under the Clean Water Act. It could also be barred from contracts if found guilty of violating environmental laws.

The company has multi-billion dollar contracts to supply fuel to government departments such as the military.

However, the government would have to weigh the impact of such a move. For example, it may have difficulty finding alternative suppliers in locations like Afghanistan.

Also, selling fuel is one of the lowest margin businesses oil companies operate. Much more money is made from pumping oil from the ground and even if the government doesn't buy BP's Jet fuel or gasoline, others will.

So the absolute value of contracts affected may not be material to BP.

BP TO FACE GROWTH HEADWINDS IN THE FUTURE — LIKELY

BP's targets for expanded production will become tougher to achieve and its financial performance will suffer from higher costs — even after spill costs and fines are paid.

BP said earlier this year it was targeting oil and gas output growth of 1-2 percent over the medium term. This plan relies heavily on BP's U.S. projects and especially the Gulf of Mexico, where it was leading the push into ever-deeper waters.

The effort to cap the Macondo well is diverting manpower, assets and management time that should be directed toward achieving the company's targets.

Even when the oil spill has been dealt with and the drilling moratorium is lifted, BP's damaged reputation is likely to mean more scrutiny from regulators than other companies, analysts said.

This means it will likely take longer than it would have expected in the past to bring fields to production.

Some commentators have called on BP to have its licenses removed.

BP TO FACE FINES AND PENALTIES — LIKELY

BP faces potential fines under several anti-pollution laws and the recent increases in the estimate of how much oil is leaking from its well suggest this could amount to a major liability.

The company has already clocked up potential fines of up to $9 billion, based on a possible $4,300 per barrel fine for polluting major waterways. With tens of thousands of barrels of oil leaking each day, the fines are still mounting.

However, it is unclear whether the government will seek the maximum fines or whether it will offset money spent remediating the damage when setting fines.

© 2014 Thomson/Reuters. All rights reserved.

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