RPT-SCENARIOS-The future for BP after the oil spill

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By Tom Bergin

HOUSTON, June 3 (BestGrowthStock) – BP’s (BP.L: ) (BP.N: ) oil spill in
the Gulf of Mexico has become the worst in U.S. history,
prompting speculation about the future of the company and its
chief executive, Tony Hayward. [ID:nN01128586]

Here are some potential scenarios facing BP:


BP and the White House have said the oil giant has the
financial muscle to cover the cost of cleaning up the oil spill
and compensating those affected.

All analysts consulted by Reuters agree on this, and that
the key determinant of how much it does finally cost depends on
how long the oil continues to flow.

Analysts and investors have started to factor in that the
spill lasts until August, when a relief well is expected to be
completed. The relief well would end the spill even if earlier
efforts to cap the ruptured well have failed.

BP’s market capitalization has fallen by around $65 billion
since the Deepwater Horizon rig sank on April 22 after exploding
two days earlier, unleashing a torrent of oil into the Gulf of

Most analysts believe this more than factors in the total
cost to BP.

“It’s not going to be anything in that ball park,” Alex
Morris, oil analyst at Raymond James in Houston said.

Estimates for the total cost start at around $5.3 billion,
an estimate from Dutch bank ING, assuming the current effort to
fit a cap on the well to capture the oil works. [ID:nN02139553]

However, estimates run to up to $37 billion — the forecast
from investment bank Credit Suisse.

As costs, especially those for damages, will be absorbed
over a period of years, BP is seen as able to handle them.

The company generated cash of $7.7 billion from operating
activities in the first quarter. Even after capital investment
of $3.8 billion, it had $3.9 billion of free cash.

Most analysts believe the company can foot the bill without
cutting its dividend or raising debt levels.

However, Credit Suisse said if its $37 billion estimate is
accurate, the company can only maintain its dividend by raising
its gearing ratio by 10 percentage points, something it may not
wish to do.

And even if BP can afford to maintain its dividend, it may
cut it as a political gesture to bolster its flagging
reputation. Democratic Senators Charles Schumer and Ron Wyden
said on Wednesday BP should cut its dividend until the full
costs for cleaning up the spill can be calculated.

BP, which owns 65 percent of the leaking well, its partners
Anadarko Petroleum, which owns 25 percent and Japan’s Mitsui &
Co, which owns 10 percent, are legally liable for the clean-up
on the basis of their shareholdings. BP has undertaken to cover
all damages itself.

CEO Hayward said in an interview with Britain’s The Daily
Mail newspaper on Wednesday that clean-up costs could hit $3
billion if the leak continues until August.

This is based on BP’s estimate of around $950 million spent
in the first 41 days after the explosion.

However, Credit Suisse estimated in a research note on
Wednesday that clean-up costs could total $15-23 billion. Other
analysts put the number as low as the $2 billion estimated by
Panmure Gordon’s Peter Hitchens.

BP has agreed to compensate all those affected by the spill
for all legitimate costs, even though under the law BP and its
partners are only liable to pay up to $75 million. BP has
undertaken to pay this money itself, rather than in conjunction
with its partners, so the full liability may fall to it.

BP has offered no estimate but Hitchens at Panmure said on
Wednesday he estimates compensation claims will be $10 billion.
Credit Suisse estimates this at $23 billion.


The collapse in its share price means BP could become a
takeover target, Dougie Youngson, oil analyst at brokerage
Arbuthnot said on Tuesday.

However, most analysts do not expect this to happen.

Exxon Mobil (XOM.N: ), Royal Dutch Shell (RDSa.L: ) and Chevron
(CVX.N: ) are the only fully publicly traded oil companies larger
than BP and deemed financially strong enough to buy it.

The U.S. government blocked the takeover of Asia-focused
U.S. oil company Unocal by China’s CNOOC for strategic reasons,
so most analysts doubt it would allow BP — the largest oil
producer in the Gulf of Mexico — to be taken over by a
state-backed oil company.

Antitrust issues could arise over BP’s refineries if it were
acquired by Exxon, Shell or Chevron, Alex Morris said. This
could force the sale of the refineries but in the current
depressed refining environment that would be difficult.

BP’s significant U.S. gas production assets could also cause
regulatory problems for any of the above, Jason Kenney at ING

However, the biggest barriers to an acquirer making a move
are the unknown liabilities that arise from the spill.

“It would be hard to see one of the other supermajors taking
on such an unknown liability,” Raymond James’s Morris said.

Similarly, selling of BP piecemeal may not attract buyers
because the individual parts would still be liable for the

Washington may also block any deal seen to strengthen anyone
in the oil industry.

“The last thing that President (Barack) Obama needs today is
“bigger oil,” ING’s Kenney said in a research note.


RPT-SCENARIOS-The future for BP after the oil spill