BP details plan for $20 billion claim fund for oil spill in the Gulf of Mexico
Thursday, June 17, 2010
How many companies could take a $20 billion body blow and still be left standing?
Not many. The amount of money BP said it would plunk into an escrow fund for oil-spill claims is enough to cover the entire NASA budget for a year. It's enough to buy all the shares of the Kellogg Co. And it's larger than the annual economic output of 90 countries.
But BP is an unusual company. It made profits of $5.6 billion in the first quarter of this year and $14 billion in 2009. It produces about 2.5 million barrels a day of crude oil from Russia to Angola, from Britain's North Sea to Alaska's North Slope. Until Wednesday, BP also had been planning to pay out $10.5 billion in dividends this year, which would still have left it with $5 billion to $10 billion in spare cash.
It could raise the money for the escrow fund this year without borrowing another dime.
That arsenal of cash and crude hasn't been enough to placate the Obama administration, however, as the company wades through the largest environmental disaster in U.S. history. And BP has struggled to convince markets that it can meet its obligations to both investors and victims of the oil spill in the Gulf of Mexico. In eight weeks, BP stock has fallen to about half its earlier value. On Tuesday, Fitch Ratings slashed the firm's credit rating to BBB, two rungs above junk. And early on Wednesday morning, investors in credit default swaps -- an insurance-like financial instrument -- were pricing an almost 40 percent chance the oil giant would default on its debts within five years.
So although the deal struck at the White House on Wednesday was designed in part to reassure Gulf Coast residents that BP would put aside enough money for their claims, it was also designed to give shareholders a sense that the financial damage was manageable and could, over time, be contained along with the oil spill.
That's why one thing BP asked in exchange for the big escrow fund was a signal from President Obama that he was not trying to run the firm out of business. "BP is a strong and viable company," the president said after his meeting with BP's chairman and top executives, "and it is in all of our interests that it remain so."
That is hard to accept for many Americans who want to punish BP. But anything else might be counterproductive. So far, the company, drawing on its worldwide operations, has paid for everything from National Guard troops to air quality testing by the Environmental Protection Agency, from $5,000 checks for shrimpers to the $100 million or so for each relief well.
"This agreement underscores that as long as we need oil, Big Petroleum is better than Bankrupt Petroleum," Lincoln Mayer, a lawyer specializing in energy and antitrust at McDermott Will & Emery, said in an e-mail. "Few companies could afford a $20 billion mistake. BP is one of them, and that's a good thing."
Investment analysts appeared reassured after the White House meeting. "It takes the political heat off the company and it steadies the ship in rough waters," said Fadel Gheit, an oil analyst at Oppenheimer. "BP is stabilizing its financial position so it can handle cleanup costs and damages." BP stock rose 1.4 percent on Wednesday, closing at $31.85 a share. And the cost of BP credit default swaps dipped slightly, indicating a bit less anxiety about corporate default.
So how does a company come up with $20 billion?
BP's chairman, Carl-Henric Svanberg, said the firm will suspend its dividend for three quarters, starting with the payment that had been scheduled for Monday. That will give it $7.8 billion in cash.