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BP May Be at Bankruptcy Risk

June 9th, 2010
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06.09.2010 original publish date
06.11.2010 update
06.14.2010 update
06.08.2014 repaired broken links, formatting update

BP May Be at Bankruptcy Risk

original article written by Net Advisor

LONDON, England. About 3 weeks ago (approximately May 19-20th) I was asked whether BP was a good stock to buy.

My answer was that I felt that there is still a lot of risk in the stock, and I posted that I felt the company has a 30% chance of bankruptcy risk. My posted answer on Yahoo! Answers was since deleted. This could have been a move by the person asking the question. I don’t know for sure, but I do know the answer is no longer there.

I had been asked the question again today (06-09-2010), and professionally people have asked me about this for weeks. So I decided to do write about it in greater detail.

I have seen more articles and more details coming out from analysts looking at the costs and risks of the spill, and they seem to be in accord that the possibility of a bankruptcy for BP exists. I now push the BP bankruptcy odds to 40%.

Here are my current views, and supportive references:

Q: Would BP be just subject to a fine?

To me, a fine is like a slap on the wrist, a penalty for doing something wrong, but you are allowed to continue your business as usual with most respects.

A fine is the least of BP’s problems. This will be a multi-billion dollar penalty in U.S. federal government fines, plus billions in costs of clean up and lost oil, plus billions in civil litigation.

If the government pursues a criminal case, this will exacerbate the problems.

“We will closely examine the actions of those involved in the spill. If we find evidence of illegal behavior, we will be extremely forceful in our response,” Holder said in New Orleans.

— Source: Fox News

There were 11 people who were killed in the Gulf as a result of the BP rig that exploded. Even the UK press has cited concern about PB.

“The US Department of Justice will look for violations of the Clean Water Act, the Endangered Species Act, the Migratory Bird Treaty Act and the Oil Pollution Act of 1990. Holder said that “nothing is off the table at this point” with regard to the range of charges prosecutors could pursue, including traditional criminal charges if they find false statements were made.”

— Source: Guardian, UK

I don’t see that the U.S. government is going to just issue some fine or settle with BP anytime soon. The leaking (gushing) oil has not even been capped yet; thus the actual long term damages are not known at this time. It may be years to be able to accurately better access the ongoing impact of the clean up, environmental damage, loss of jobs as a result of the damage, loss of tourism to the affected region which covers Texas to Florida at this point.

I would thus expect to see many years in civil litigation assuming the company does not file for Chapter 11 first. Even with Chapter 11, Plaintiffs claims could still take a decade or longer to be resolved.

How do I calculate that litigation could take a decade or longer? Deductive reasoning using history as a bench market.

Prior to this Gulf spill, the Exxon-Valdez spill in Alaska has rained the title of worst environmental disaster in the U.S. Litigation in the Exxon-Valdez case went on for 19 years (1989-2008). Another sad commentary for the people who were negatively impacted (financially) with the Valdez spill is that 20% of them died before the case was over.

“…in the years that Exxon and its successor Exxon Mobil have challenged the jury’s verdict, a fifth (20 percent) of the plaintiff class members have died.”

— Source: Reuters

This BP Gulf spill is far worse in every respect than the Valdez spill, so I would argue that it is highly possible that litigation could easily take a decade or longer. The 1989 Valdez spill impacted the coastal areas of Alaska. In this 2010 PB Gulf spill, we have multiple states affected such as Texas, Louisiana, Alabama, and Florida currently subject to job losses, environmental, and loss of tourism damages.

PB Dividend Likely to be Cut or Eliminated.

The risk to the dividend being cut in my view will be a 99.999% chance.

Some analysts place a possible takeover scenario if the price gets too low. I think the odds of this are very low. Why would anyone want to take over a company with unknown and potentially unlimited liability?

Here is the Bankruptcy Risk:

1. “BP’s costs for the cleanup could run as high as $23 billion, according to Credit Suisse.” (Source: CNBC)

2. “BP could face an additional $14 billion in claims from gulf fisherman and the tourism industry.” (Source: CNBC)

3. Federal Government fines, and state government fines, and state litigation may not be factored here.

4. The total costs of “$40 billion is not out of the question.” (Source: CNBC)

How Does BP pay for all of this?

5. “(BP)…has about $12 billion in cash and short-term investments.” (Source: CNBC)

Math:

$12 billion cash less a possible (arbitrary) $40 billion in liabilities = negative $28 billion short of cash.

PB says it has “plenty of dollars” on hand, and bank credit lines. (Source: Reuters)

The problems here are two fold.

(1) I think the cost to BP will far exceed its cash by a multiple margin, and based on the data above, we seem to be in the realm of possibility.

(2) PB should have learned from the financial crises of 2007-2009+ that when banks feel that there is a risk of credit or loan default, banks will cut credit lines. BP should not rely on credit lines unless it is part of a (bankruptcy) restructuring where the banks become senior creditors, otherwise the banks may not make the loan. Then you have the Obama Administration that might challenge that legal move – after the fact.

PB is in desperate mode to control media over the issue trough advertising campaigns and this latest PR move

“BP Buys Search Term ‘Oil Spill’ from Google”

— Source: CNBC Video, 06-07-2010

Also in the PB bankruptcy risk camp:
Energy investment banker Matt Simmons said on CNBC’s Fast Money yesterday,

“I don’t think BP is going to last – at least not for more than a matter of months.”

— Source: Matt Simmons, Chairman and CEO of Simmons & Company International, a prominent oil-industry insider and one of the world’s leading experts on the topic of peak oil.

Stock Rebound? or Dead Cat Bounce?

The stock could have a short pop upon successful capping of the spill. Then shortly after that, the damages will be accessed, and I think the costs could exceed BP ability to stay in business, that a restructuring may be in the works.

PB Bailout?

I do not subscribe to the BP bailout theory.

1. The USA will not put 1 cent in a bailout unless political leaders want to commit political suicide and lose votes in every oil affected state and every state in sympathy to the damage of the spill.

2. BP is a UK company and based on what I have read, the UK in not in position to put $40+ billion into a business. The UK has been facing economic challenges, just like the EU. (Source: Wall Street Journal)

3. You have the Obama Administration looking to take any advantage to control a situation and insert that political change many people voted for. Now, control does not mean to take charge of and fix it. It means to rewire laws , add 1,000’s of pages of new regulation, and punish a company out of business if possible.

“You never want a serious crisis to go to waste”

Rahm Emanuel, Obama’s chief of staff ( Source: Wall Street Journal, 11-21-2008)

When has the Obama Administration ever become business friendly, Wall Street friendly, or oil friendly? So why would anyone think that BP will get a bye with a big fine and go about their business?

Even though president Obama has received the largest campaign contributions ever from BP, and congress has received millions in campaign contributions over the last 20 years, this won’t help BP this time.

“BP and its employees have given more than $3.5 million to federal candidates over the past 20 years, with the largest chunk of their money going to Obama, according to the Center for Responsive Politics…

…During his time in the Senate and while running for president, Obama received a total of $77,051 from the oil giant and is the top recipient of BP PAC and individual money over the past 20 years, according to financial disclosure records.”

— Source: Politico

The Obama Administration denies the public records that he received $77, 051 of oil money from BP. (Source: Politico)

How is Wall Street Responding to the News?

BP hit a 14 year low on 06-09-2010, closing at $29.20 on heavy trading volume of 240.8 million shares. The stock previously had a three month average trading volume of 29 million shares.

Wall Street institutions have been dumping the stock according to a report by Morning Star. Please note the dates. The date of the spill began April 20, 2010. There was no advance warning of the spill before this date.

BP said it was unaware of the reason for the U.S. (stock) share sell-off. (Source: Economic Times) We’ll, let’s see there is this slight oil spill in the Gulf of Mexico, 11 people were killed from it, multiple industries are being affected, there are over 6,000 pending lawsuits, the cost of protecting just $10 million BP’s debt via Credit Default Swaps have doubled in cost since April 30, 2010.

“The cost to protect $10 million of BP debt for a year with credit-default swaps almost doubled to $512,000, according to CMA DataVision. It was $29,000 on April 30.”

— Source: Bloomberg-Businessweek (PDF)

So, yea, why would BP even question why their stock would go down?

Financial Disclosure: Holding longer term put options on PB prior to this article.

06.11.2010 Update and Financial Disclosure edit:

Closed put options at gain on 06-10-2010 on the stock’s technical rebound. Opened (cash secured) short puts creating short term bullish position on the stock’s technical rebound. Please note that trades and positions are not going to be updated in any frequency or at all. Please refer to disclaimer. Also please note even though the stock is in a current technical rebound (dead cat bounce), none of the issues in PB have changed since the spill (04-20-2010) to date (06-11-2010), and in fact the issues have become worse. PB’s U.S. operations are slightly more at risk than international operations. Upon capping of the spill, expect another stock bounce. But longer term, all of the liability and legal issues remain in the company.

06.14.2010 Update and Financial Disclosure edit:

Ok, closed the long dead cat bounce trade we had over last week, and went short again. Will not be updating trading on a regular basis.

The move by the Obama Administration & Congressional members to try and coerce or force BP to escrow billions of dollars WITHOUT a single court hearing first, WITHOUT a single court order, WITHOUT any rule of law, is a prime example why this stock is in deep caca. The U.S. gov is not interested in existing law; they are interested in making laws up as they go along. This is a very disconcerting attempt to create a legal precedent without review of a court.

Even though most of us might agree over the anger and issues over the BP oil spill and rightfully so, the fact of the matter is, that there needs to be legal recourse exercised not a political recourse.

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Above image is a Registered Trade Mark of BP

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