washingtonpost.com
BP investors struggle to factor in the unfathomable

By Steven Mufson and Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, June 6, 2010; G01

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.

"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.

"To draw a line under this . . . the leakage needs to be brought under control," he said Thursday, adding that the company faces a "nightmare of litigation," including a criminal investigation.

BP chief Hayward said Friday that he expected the majority of containment, removal and cleanup costs to be complete by year's end, but he added that "other elements are likely to be spread over many years in cash terms, including fines and penalties and longer-term remediation, restitution, claims and litigation cost."

In addition, Hayward said that the disruption in BP's Gulf of Mexico drilling program reduced its expectations of its oil production there by 50,000 barrels a day in 2011 and 75,000 barrels a day in 2015.

The dividend

In the Friday call, BP executives were noncommittal about the fate of dividend payments, which might need to be cut for political, if not financial, reasons. On Friday, during a visit to the Gulf Coast, President Obama warned BP against paying billions of dollars in dividends while "nickel-and-diming" people seeking claims in the region.

"Future decisions on the quarterly dividend will be made as they have always been on the basis of all circumstances at the time," BP's board chairman Carl-Henric Svanberg said in the call. "All factors will be considered and decisions taken in the long-term interest of our shareholders." Given the drop in the stock price, the dividend yield on the stock is nearly 9 percent. But analysts now widely expect a cutback when BP announces second-quarter profits July 27.

Smaller dividend payments would have a broad impact. The London-based giant accounts for about 12 percent of all dividends paid in Britain. A cut would be most keenly felt among pensioners there. But the impact would also reach the United States, where about 40 percent of the company's shares are held. At the end of March, major institutional holders of BP stock included State Street and Wellington Management; the Bill and Melinda Gates Foundation also had a substantial stake.

Some costs of the oil spill will be indirect and intangible, said Molchanov of Raymond James, who noted that BP's brand and industry reputation will suffer.

"From the standpoint of the stock, the relentless day-to-day headlines of BP being lambasted by Washington, the local Gulf Coast communities, by shareholders . . . that is extremely negative for the stock," he said.

Leadership tested

It is also a huge distraction to the company's leadership. Hayward has been in the United States almost nonstop since getting a phone call about the disaster during breakfast in his London home April 21. He has dispatched most of his top lieutenants, including chief operating officer Doug Suttles, managing director Bob Dudley, BP North America chief Lamar Mackay and head of exploration and production Andy Inglis.

Hayward said Friday that he will set up a "stand-alone" group led by Dudley to deal with the spill so that other parts of the company can concentrate on the rest of the business, but top executives like Hayward will probably deal primarily with the oil spill for a long time to come.

Moreover, Hayward, who had boosted company earnings and its image in three years as chief executive, has been blasted by controversy about remarks he has made, forcing him to apologize to residents of the Gulf Coast and fend off calls for his ouster. BP's board chairman Svanberg asserted confidence in Hayward. "This is a tough job, and Tony and the team continue to work relentlessly and they have the Board's full support," he said.

Hayward added, "I personally think it's right, that I should be the lightening rod because it allows everyone else to go [about] doing the job, but I have got a pretty thick Kevlar jacket." He said "they're throwing a few words at me, but I'm a Brit, so sticks and stones can hurt your bones, but will never break them -- whatever the expression is."

Some of those stones could still hurt the company, though, as political outcry grows in the United States, which is a key part of BP's global strategy. The Gulf of Mexico accounts for about 12 percent of BP's 2.5 million barrels a day of oil production. Over the years, BP has bought two big U.S. firms, Sohio and Amoco, giving it a major presence here. Recently it bought off-shore leases from Devon Energy, including prospects in the Gulf of Mexico as well as Brazil. Any criminal charges brought against the company by the Justice Department could impede its ability to obtain licenses from the government.

Obama's options

One example of the growing chorus of critics is Reich, now a professor at the University of California, Berkeley, who has called for putting BP's U.S. operations into "temporary receivership" like American International Group or General Motors, until the spill is cleaned up. Or, he said in an e-mail, Obama could follow the lead of President Harry S. Truman, who nationalized the U.S. steel industry on the eve of a strike in 1952. The Supreme Court ruled that Truman lacked the authority to seize the steel mills, but Reich argues that Obama could claim authority to step in under the Oil Pollution Act of 1990.

"If this thing continues to worsen, it becomes untenable for a for-profit corporation to be in control," Reich said. "BP's primary responsibility is to its shareholders; only the government, through the President, has a specific responsibility and accountability to the public. Call it temporary receivership, special-purpose nationalization or liverwurst -- it won't matter. The government will have to take over. But only temporarily, until the spill is stopped."

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