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Jul 18, 2010 3:27 PM by Chris Welty

Off Death Watch, BP's Future Still Open Question

NEW YORK (AP) - The future of BP PLC has shifted in recent days
from a death-watch discussion to a debate about how valuable the
British oil giant will be after it finishes paying for the worst
offshore oil spill in U.S. history.
BP gained temporary control of its broken well in the Gulf of
Mexico on Thursday and is counting on shutting it off permanently
within weeks. Its shares have regained more than a quarter of the
value lost in the wake of the April 20 explosion on the Deepwater
Horizon drilling rig. Talk of a possible bankruptcy or takeover of
the company has mostly faded.
But the company still faces the daunting task of paying huge
government fines and royalty payments, cleanup costs, damage claims
and legal expenses for years. Analysts estimate BP's final tab for
the Gulf oil spill will be anywhere from $50 billion to $100
billion.
Many analysts feel BP can cover the costs if they're spread out
over years or even decades. But others don't like the uncertainty.
They note that the asset sales needed to offset at least part of
those costs will likely make it a smaller company with reduced cash
flow.
"We still don't have any way of gauging" how much BP could
eventually spend on the spill, Macquarie Research analyst Jason
Gammel said. "We're certainly not buying the stock."
Others are more encouraged. "People are relatively optimistic
about the situation for the first time since this started," said
Dougie Youngson, an analyst with Arbuthnot Securities in London.
BP shares traded in the U.S. were worth $60.48 on April 20,
hours before the explosion of the drilling rig triggered the oil
spill. They then spiraled downward to as low as $26.75 during
trading on June 28. That slide wiped out $105 billion in market
capitalization.
The stock began to rebound this month as details emerged about
the possible sale of $10 billion or more in assets to help cover
BP's liabilities. The temporary capping of the well helped send the
stock 9 percent higher last week to $37.10.
BP promised the Obama administration it will set aside $20
billion over four years to pay spill-related claims along the Gulf
and has spent $3.5 billion so far. But beyond that, BP says "it is
too early to quantify other potential costs and liabilities
associated with the incident."
Those include:
- Possible civil fines of up to $1,000 for every barrel of oil
spilled. With the government's estimate of the spill ranging from
2.15 million to 4.3 million barrels, the fine could be from $2.15
billion to $4.3 billion.
- The government also wants BP to pay royalties at a rate of
18.75 percent on the oil it collected from the well. BP put that
figure at 826,800 barrels. However, the company could also owe
royalties on the oil spillled into the Gulf if investigators
determine that the spill was the result of BP's negligence.
- BP has vowed to stay in the Gulf until the oil is cleaned up,
which will take years. It's hired thousands of people to clean
beaches and marshes and skim oil off the water. It also has to pay
cleanup costs incurred by the government.
- Anadarko Petroleum Corp. and MOEX LLC, BP's partners in the
blown-out well, are contractually obligated to pay 25 percent and
10 percent of the costs, respectively. But they have refused to pay
BP's initial bills totaling $388 million because they claim BP was
negligent in its management of the well.
- The biggest wild card is legal liabilities. Lawsuits have been
filed on behalf of workers who died or were injured in the blast,
as well as local businessmen, shareholders and employees.
Analysts estimate BP's operations will generate about $30
billion in cash this year if oil prices hold steady. BP recently
cut back capital spending to around $18 billion, so that leaves
about $12 billion in free cash. Normally, dividends totaling $10.6
billion would come out of that, but BP suspended dividend payments
in June.
BP also has another $5 billion in cash, plus a $15 billion
credit line. Adding in potential asset sales, that means BP will
have as much as $30 billion available for paying penalties and
other liabilities.
The company's debt level stood at about $32.15 billion at March
31. It has talked to banks about borrowing more money if needed.
Even if BP sells some assets, it's likely to remain one of the
largest non-government-owned oil companies in the world. Just how
big? The high-end estimate of around 4 million barrels spilled in
the Gulf amounts to no more than one day's output from BP's vast
global operations.
If BP can continue to get between $70 and $75 a barrel for the
oil it produces, analysts believe its cash flow will remain
sufficient to cover its Gulf liabilities. That doesn't mean people
pressing claims against BP have to root for higher prices, but the
reality is that a sharp drop in oil could put them at risk.
West Texas Intermediate crude, the light oil that is the
benchmark for global prices, is trading at around $76 a barrel.
Brent crude, which is found in the North Sea among other areas, is
priced around $75.40.
The company's financial condition will become clearer when BP
reports results for the second quarter on July 27. There's a chance
it will announce the sale of assets at that time.
Published reports have suggested the company is talking with
Apache Corp. about selling a stake in the Prudhoe Bay oil field in
Alaska, but BP has declined to disclose specifics.
Youngson, the Arbuthnot analyst, said a sale to Apache would fit
with BP's plan to sell assets that don't affect the company's
long-term growth, a strategy it had before the Gulf spill. It also
would make sense politically, he added.
Another candidate for a sale is BP's 60 percent stake in
Argentine Pan American, an Argentine oil and gas producer that also
has operations in Bolivia and Chile. Analysts estimate the stake is
worth about $9 billion.
Oppenheimer & Co. analyst Fadel Gheit said BP doesn't need to
sell assets now, but the company is digging in for years of damage
claims. "Eventually they know they're going to have to sell
something," he said. "It's not if, but when."

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