BP Gets A Lifeline

As expected, once the amount is ascertained, the removal of uncertainty will certainly boost the share price. This will pave the way for the company to be sold off. There is not much chance BP can survive or realise its potential under the banner of BP. The reserves will not get their proper valuation and institutional shareholders are likely to put pressure for the company to be sold to someone to extract value.

It is likely to be highly attractive to Petrochina, just the reserves alone. Petrochina is also possibly the only one willing to pay a premium. Any takeover is likely to be circa $45.

Dealbook: Shares in BP made up part of their recent losses Thursday as investors welcomed a deal struck with President Obama to set up a compensation fund for the victims of the oil spill in the Gulf of Mexico. The shares gained as much as 9.7 percent in early London trading. They had fallen 45 percent since an oil rig exploded in April, Julia Werdigier reports in The New York Times.

Some investors said the agreement with the United States eliminates some of the uncertainty about the costs for the oil spill cleanup and compensation, even though BP scrapped dividend payments as part of the deal.

“It’s a positive because there were no surprises in the deal, the dividend had been well communicated beforehand and at least in the near-term the agreement gives investors a little bit more certainty and something to work with,” said Keith Bowman, an analyst at the asset manager Hargreaves Lansdown in England.

The cost of insuring BP against default also fell and its bonds rose, a sign that fewer investors are speculating that BP might go bankrupt. The BP chief executive Tony Hayward is due to testify before Congress Thursday, but the agreement with President Obama, struck at the White House Wednesday, was widely seen as a step to calm tensions between BP executives and Washington about the company’s efforts to clean up the spill.

BP agreed to create a $20 billion fund to pay damage claims to thousands of fishermen and others living and working along the Gulf Coast. The company also said that it would sell oil and gas fields and cut investments in drilling if necessary to ensure BP had enough money to pay for any costs.

Some shareholders in Britain had previously opposed plans to halt dividend payments, which are among the most generous of any British company, as a result of U.S. pressure. BP stock is also widely held in pension funds across the country and it would be the first time since World War II that BP was not paying a dividend. But the political opposition in the United States to paying dividends to shareholders while the total cleanup cost and damage claims remain unknown started to weigh on BP’s share price.

“Hopefully the deal will remove just a little bit of pressure and allow BP to fully concentrate on the oil spill,” Mr. Bowman said.

BP, Chance Of A Good Trade?

Chance of a lifetime? In a crisis, sentiment will crowd out sensibilities. Has BP fallen enough? Many analysts are trying to calculate the damages from the oil spill. My verdict is investors should carve out their intended exposure into 3 parts, and start buying one third now around $33-$35. Only buy the second parcel if it hits $29 or $37. The last parcel should only be bought when it tries to breach $40. If it continues to fall below $29, wait for $25. I could be writing a long essay on that strategy, but if you sit and think, you should come to why that strategy is sound.

BP has said that it will cover all legitimate claims resulting from the spill. But can it handle a worst case scenario? BP is already spending millions to control the spill, but reparations for economic damage could run into many billions of dollars.

On the income side, BP certainly has the resources to handle a sizable number of claims. The oil company had income last year of $63.4 billion. The total market value of the company currently sits at $142 billion.

Now let's look at the liability risk, starting with just one county. In Harrison county, MS, due north of the spill, the total economic activity at risk is in excess of $1.4 billion. In the just the six counties closest to the oil spill the potential economic activity imperiled by the spill comes to $4.9 billion.

But there are more than 50 counties potentially in harm's way, from the Florida Keys to the coast of Texas - and that's not counting the exposure BP would incur if the oil flows around the Keys and up the East Coast by way of Gulf stream currents. With tar balls showing up now on the Florida keys, that's a possibility that can't be discounted.

Wall Street analysts continue to believe that BP can pay for its mess in the Gulf, although their confidence level has been dinged by the company's inability to stem the spill - and the political fallout. But at $32.20, the shares are still trading at levels last seen 14 years ago.

Spurred by pressure in the U.S. to fully compensate economic victims of the Gulf spill - and by Wednesday's nearly 16 percent stock plunge - BP officials early Thursday reiterated that the company has enough cash to cover the costs of the Gulf spill.

Analysts agree, saying that BP will have around $5 billion this year to pay damages and clean-up costs once dividends and capital expenditures are covered. BP has already spent more than $1.4 billion trying to contain and clean up the oil and pay claims to Gulf coast businesses.

To date, almost 42,000 claims related to the spill have been submitted and more than 20,000 payments already have been made, totaling over $53 million.

Because of BP's strong cash flow, analysts currently doubt that the costs of cleaning up the mess will push the company into bankruptcy. A worst-case scenario for financial damages and penalties is more than $60 billion, which would be paid out over several years.

I suspect in terms of liability, a lot of it can be recovered from insurance and limited liability claims. What the company cannot recover from may be " company standing and reputation" going forward. Once the liability component has been ascertained, I strongly feel that the board will have no choice but to sell to probably Petrochina, the only one with the resources to claim that asset. A combined PetroChina-BP would have oil and gas reserves that were 73 percent and 187 percent larger, respectively, than ExxonMobil Corp and Royal Dutch Shell Plc.



The sale to Petrochina has to go through as BP tries to distance itself from the negative press and claims going forward. By selling, it will give BP a fighting chance to re-emerge from the disaster. A lot of pension funds, especially in UK will be putting a lot of pressure on the board to sell, and they will probably get the quickest deal at the best price with Petrochina.

Looking at the possibility of a $60 billion worst case scenario by Oppenheimer, the assets of BP is still more than doubled that easily. Its income per year would cover that. Stanchart see a worst case scenario costing BP $40 billion.