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BP investors struggle to factor in the unfathomable

Cleanup and containment efforts continue at the Gulf of Mexico site of the oil spill following the Deepwater Horizon explosion.

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By Steven Mufson and Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, June 6, 2010

Former Labor secretary Robert Reich wants to place BP's U.S. operations in temporary receivership. Sen. Ron Wyden (D-Ore.) wants the oil giant to suspend its dividend payments. Attorney General Eric H. Holder Jr. is weighing criminal charges. And lawyers in more than a hundred lawsuits want BP to pay billions of dollars in damages for harm done to people's health, the environment and businesses.

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"At this stage, it is impossible to predict the longer-term cost of environmental remediation, claims and litigation, but they will be sizable," BP chief executive Tony Hayward said in a conference call with investment analysts Friday.

So would anyone in his right mind buy shares in this company?

Yes. Despite the fatal explosion on the Deepwater Horizon drilling rig that triggered the massive oil spill in the Gulf of Mexico, 10 of the 14 leading investment analysts tracking BP have "buy" ratings on the company, including one who has upgraded his recommendation.

The reason: BP is a colossus with more than 18 billion barrels of proven reserves, operations in more than 100 countries, oil production everywhere from Angola to Russia to Alaska and a new agreement in Iraq. Even after paying out its regularly quarterly dividends at a rate of $10.5 billion a year, BP will still have $5 billion to $10 billion in cash flow, depending on the price of oil. And its relatively modest debt level means that it could also borrow money if necessary.

"So we've got considerable firepower here to deal with the costs, any costs as they accrue," Byron Grote, BP's chief financial officer said in the conference call.

Many analysts think the staggering drop in the price of BP's stock since the April 20 explosion has been too steep. Mark Gilman, an analyst with Benchmark, boosted his rating to "buy back" May 26, saying that the reduction in BP's market value since the spill began "implies gross, pre-tax environmental claims and costs to be in the $80 billion to $110 billion range, which we believe to be unrealistically high."

In an interview Thursday, he said, "while we're not prepared to make a cost estimate, we're comfortable saying it's not going to be in that magnitude."

Twinge of anxiety

Most people, however, haven't been following Gilman's advice. After he upgraded his rating, BP's shares have plunged even further. Since the disaster, the stock has sunk 39 percent, erasing more than $70 billion of market value. (Other companies involved in the well have also tumbled, including rig-owner Transocean, with shares down 46 percent and service-provider Halliburton, down 33 percent. Lease partner Anadarko Petroleum's shares are off 40 percent.)

BP shareholders are nervous, and while the oil giant has the resources to survive such a crisis, estimates of the cost to the company keep rising. Credit Suisse on Thursday issued a report that clean-up costs could total $15 billion to $23 billion and that legal claims could drain $14 billion more from BP's coffers.

Raymond James & Associates this week nearly tripled its estimate of costs to $7.5 billion -- not including any criminal or civil liabilities. And the three leading ratings agencies -- Moody's Investor Service, Fitch Ratings and Standard & Poor's -- lowered their credit ratings on BP's debt.

Pavel Molchanov, an analyst with Raymond James, downgraded the stock to market perform -- neither better nor worse than the market average -- April 29, nine days after the accident, and doesn't expect an improvement as long as the negative headlines and oil continue to flow from the gulf.


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