Wednesday, June 2, 2010

BP oil spill debacle - part 2

Now it seems that BP is not too cheap given the more in depth research done after my first post. With both a legal probe and a criminal probe, this counter is likely to go even lower. Now an estimated 12 -19 kboe are leaking from the well, much more from previous 5 kboe estimates. Valdez spilled 260 kboe and spend US$ 2 bn in clean up, US$1 bn in civil and criminal charges and US$0.7 bn in damages totalling approx US$3.7bn.

For BP, it has been 43 days since the spill, estimated 516 - 817 kboe spilt in the Gulf, about 2-3x effect of Valdez. Total cost will run up to around US$3.7 *2-3 = US$ 7.4 - 11.1 bn (No FV) and approx US$ 11 - 16.5 (FV 20 years).
The decline has cut about £40bn from BP's market capitalization. 
  • Oil Pollution Act caps damages to US$75 mil, however judging Obama's response, the cap may well be out of the window back to the former US$ 10 bn cap, BP will pay US$ 6.5 bn as they own 65% of the well. 
  • So total compensation to pay will be US$ 17.5 - 23 bn 
  • Do not forget that other oil majors and general market fell 10-15% over the same period 
  • Excluding the spill, BP ought to have only lost around £10-15 bn of market cap 
  • Taking that into account, current price is estimating spill costs to be £25-30 bn
  • BP has operating cashflow of US$27.7bn in 2009, with debt to equity 19%, US$10.4 bn in dividends and US$ 20 bn in capital
Efforts to plug the well with mud, termed "Top Kill" failed to kill anything and now plans to cut and install a new riser to bring the oil to a new containment vessel. There has also been news of BP making a third of the Gulf waters unfit for fishing, compensation will be very very costly. Insurance covers only current losses (equipment etc) not future earnings.

Other stocks related to Deepwater Horizon well got hammered. 
(Price fall today / since April 20)
  • Transocean Ltd. (NYSE: RIG)           12% / 46%  (Owner of deepwater Horizon Rig)
  • Anadarko Petroleum (NYSE: APC)    20% / 43%  (25% stake in the well) 
  • Halliburton (NYSE: HAL)                   15% / 36%  (Crew involved in plugging the well)
  • Cameron International (NYSE: CAM)  12% / 31%  (Made the well blowout preventer)
  • BP (LON: BP)                                  13% / 34%  (The worst of everything all in one)
This compares to FTSE drop of 11%.
While the fall in price of BP is severe, any further failures, additional probes and lawsuits pending, loss of lives, loss of jobs, hiring cleanup crew etc will continue to add up to the cost tally. It is a 2 leg variable and increases exponentially with each passing day. Furthermore, it is noted BP has a long history of compromising safety with poor equipment and relatively unskilled workers. I do not think to jump in now and invest in a firm with management of a doubtful integrity will be the most prudent thing now, given that there is little upside from the costs and figures may run higher. (numbers I gave are approximate and such lawsuits go on for several decades).



Oil is still the best place to be.

Post a Comment