http://www.marketwatch.com/story/bps-market-value-halves-as-spill-costs-loom-large-2010-06-09?dist=afterbell
June 9, 2010, 6:58 p.m. EDT
BP hit by doubts over ability to pay for costs of oil spill
By Steve Gelsi & Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) — BP PLC shares slumped Wednesday, leaving its market value halved in fewer than seven weeks, while the oil giant’s bonds were crushed as questions mounted over whether it can afford to clean up the worst environmental disaster in U.S. history.
Oil-industry insider Matt Simmons, head of the Texas-based, energy-focused investment bank Simmons & Co., told Fortune magazine Wednesday that BP (BP 32.28, +3.08, +10.55%) (UK:BP. 360.10, -31.45, -8.03%) will run out of cash from lawsuits, cleanup costs and other expenses.
“They have about a month before they declare Chapter 11” bankruptcy, Simmons said.
High-resolution video of oil leak
BP releases new video from the busted oil well on the Gulf of Mexico seabed.
“One really smart thing that [President Barack] Obama did was about three weeks ago, he forced BP CEO Tony Hayward to put in writing that BP would pay for every dollar of the cleanup,” he added. “But there isn’t enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this, my guess is that they’ll panic and go into Chapter 11.”
BP’s U.S.-traded shares slumped 16% to close at $29.20 on heavy volume. It’s the lowest level for the stock since 1996. The shares traded above $60 before April 22, the day the Deepwater Horizon drilling platform sank off the coast of Louisiana.
BP’s 2013 bonds, which carry a 5.25% coupon, slumped on Wednesday, pushing the yield above 8%.
BP already has spent more than $1 billion dealing with the spill, and some analysts estimate the disaster could cost up to $40 billion. The company also has said it will pay for all cleanup costs and will cover all “legitimate” claims. Read more about the pressure on BP.
Art Hogan, market strategist for Jefferies & Co., said traders at the firm cited speculation that BP was talking to bankruptcy lawyers as one instigator of the selloff on Wednesday.
“It’s hard to calculate the ultimate cost of the spill,” Hogan commented. “No one even knows how much oil is coming out of the well and there could be more impact from a hurricane. With all the new technology nowadays with remote-controlled robots and video cameras, it’s happening in real time in front of everyone all day long. It’s a torrential disaster.”
BP spokesman John Pack said the company remains on solid financial footing, with 18 billion barrels of proven reserves. “I have no idea where that rumor is coming from,” he replied, when asked if BP was talking to bankruptcy lawyers.
Pack pointed to a statement made last week by BP’s chief executive. “Under the current trading environment, we are generating significant additional cash flow,” Hayward said. “In addition, our gearing is currently below the targeted range, and our asset base is strong and valuable, with more than 18 billion barrels of proved reserves and 63 billion barrels of resources. All of this gives us significant flexibility in dealing with the costs of this incident.”
The Deepwater Horizon platform exploded on April 20, killing 11 people. It sank two days afterwards, triggering the worst environmental disaster in American history.
Twelve angry jurors
Gregory Evans, a partner at Milbank Tweed Hadley McCloy LLP who has represented large corporations in environmental suits, said BP may have to pay billions of dollars in an environmental lawsuit.
“The [liability] exposure is very high for BP, because there appear to be statements that would indicate this was potentially more than negligence,” he commented. “As we know from Exxon Valdez and other serious catastrophic mass tort cases for environmental-damage litigation, juries can become very angry with management and express that anger in very high punitive-damages awards.”
‘Juries can become very angry with management and express that anger in very high punitive-damages awards.’
Gregory Evans, Milbank Tweed Hadley McCloy
Still, punitive damages will likely be kept on par with whatever BP pays for compensatory damages, a rule laid down by the U.S. Supreme Court in its decision to reduce damages in the Exxon Valdez (XOM 61.84, +1.81, +3.02%) case, Evans noted. Those damages were awarded after many years of court battles, and also included payments from insurance companies.
Evans said he had no reason to believe that BP would file for bankruptcy in the near future, but even if it did, claims against it would still be paid under a provision called the estimation process. “The estimation process in bankruptcy can be efficient and it can lead to full payment of claims,” he added.
Ahead of BP’s big slide on Wednesday, analysts at Tudor Pickering Holt indicated that talk had been escalating about a bankruptcy, but concluded that BP is worth more to the government and to investors if it keeps operating.
“There is a frenzy for sources/experts/analysts to one-up each other on the assessment of fines and liability and talk about BP as a donut-hole stock (zero),” the Tudor analysts said. “We have a really hard time getting there from a practical perspective, as BP is worth more alive than dead to the U.S. government and all those that want milk from this future cash cow.”
Steve Gelsi is a reporter for MarketWatch in New York.
Alistair Barr is a reporter for MarketWatch in San Francisco.
Special thanks to Richard Charter