BP facing a wave of pressure, but not from its balance sheet
Tuesday, May 11, 2010
Standing outside BP's Houston offices Thursday, Interior Secretary Ken Salazar said that the company's "life is very much on the line here."
BP's financial wounds from April 20 drilling-rig explosion might be serious, but they probably won't be fatal. One analyst report, issued by Citigroup, even declared in its title, "Reaction to the Gulf of Mexico oil leak is a buying opportunity."
Even though most investors have soured on BP, driving down its stock price by 19 percent and wiping out $36.7 billion of its market value since the explosion, the business remains a behemoth. The company has a market value of $152.6 billion, bolstered by a global marketing network, a lucrative oil venture in Russia, a promising contract to boost production in a giant Iraqi field and scores of other large interests. It remains the largest oil producer in the Gulf of Mexico. Measured by revenue or assets, it is among the world's five largest companies.
Citigroup analysts said stockholders' reactions seem "disproportionate to the likely costs to the company." It noted that punitive damages against Exxon for the 1989 Exxon Valdez oil-tanker spill were originally set at $5 billion in 1994 but were reduced on appeal. The company agreed last year to pay less than $1 billion, including interest.
For now, at least, BP's prodigious costs combating the oil spill in the Gulf are outweighed by prodigious profits.
On Monday, BP said it spent $350 million in the first 20 days of the spill response, about $17.5 million a day. It has paid 295 of the 4,700 claims received, for a total of $3.5 million. By contrast, in the first quarter of the year, the London-based oil giant's profits averaged $93 million a day.
The amount of oil leaking into the Gulf of Mexico has been estimated at 5,000 to 25,000 barrels a day. In the first quarter, BP produced 2.5 million barrels of crude oil a day worldwide -- and it received $71.86 for every barrel.
BP has strong borrowing capacity, too. Analysts say it could get as much as $20 billion without exceeding its debt targets. "Even a pretty large digging into the pockets would be within our capacity to handle," said Andrew Gowers, a BP spokesman.
The company does, however, have large needs -- with a $20 billion capital spending plan for this year and $8.4 billion needed for acquisitions, mainly of assets from Devon Energy.
Now, cleanup costs must be added. Relief wells being drilled to intercept the damaged one could cost more than $100 million each. Scores of lawsuits have been filed. Legislation passed in 1990 after the Exxon Valdez accident makes BP and its partners responsible for cleanup costs and up to $75 million in damages.
BP officials said Monday that they expect to exceed that. "A $75 million liability is not where our head is at this moment," said David Nagel, an executive vice president.
On Friday, Standard & Poor's affirmed BP's credit rating but revised its outlook to "Negative" from "Stable." "Provided BP can stem the well and clean the spill within a reasonable time, the company has adequate liquidity and financial headroom to meet immediate costs," said a report by S&P credit analyst Simon Redmond. "However, it is still too early to estimate with any degree of confidence the full future impact on BP from the spill."
BP will survive, analysts say, but damage caused by the rig disaster that killed 11 workers was still huge. Fadel Gheit, an oil analyst at Oppenheimer, said the accident was "a major disaster with catastrophic implications not only for the companies involved, but also for the offshore oil industry and the economies of the Gulf Coast."