IT IS almost incredible that the mistakes of one person or a few individuals on a rig in the Gulf of Mexico could virtually destroy a massive company such as BP. As I write, the company’s shares have fallen to a 14-year low, with about £65billion, or $90billion, of the company’s stock-market value having been wiped out since the Deepwater Horizon disaster in April.
Stock markets are notorious for overreacting to short-term events – both positive and negative – and BP’s share price will presumably recover when the oil leak is eventually stopped. However, there can be no doubt that the disaster has done huge and permanent damage to the company – and possibly the oil industry as a whole.
The clean-up costs will be very small in comparison with the $90billion figure above, but BP is now in a very weak financial position. The latest cost estimate is about $2.5billion and still counting, but the company has been bullied by President Obama into setting up a fund of up to $20billion.
Even that sum is much less than the $90billion loss in value. However, the market is obviously concerned about the long-term damage to BP’s reputation, particularly in the US.
The insurance regime seems unclear. I understand that BP’s policy is not to insure its activities externally. However, the liability of other companies involved in the Deepwater Horizon disaster, such as Anadarko (partner in the well), Transocean and Halliburton, is obviously going to be a very complicated legal issue.
Under pressure, the company has been forced to suspend payment of its latest quarterly dividend, which will be disappointing news for pension funds and other investors. The credit-rating agencies have also downgraded the quality of BP debt. The value of the annual dividend is about $10.5billion.
There have been many articles discussing possible takeover of the company, although I believe that very unlikely for the reasons given below. What is much more probable, in my opinion, is a fire sale of assets, including some in the North Sea, which will severely, and permanently, diminish the company.
There are few potential takeover companies. ExxonMobil and Shell have been mentioned, but I don’t see either being seriously interested, and in either case, there would be regulatory concerns. PetroChina is another possibility, but there would also be a lot of political opposition to that.
The likeliest outcome, in my opinion, is a sale of assets to fund the liabilities of up to $20billion. But where are those assets? BP currently generates about 35% of its revenue from US operations. One option must therefore be to pull out of the States, given the damage to its reputation. I suspect, however, there will be few potential buyers for the Gulf of Mexico assets because of widespread concerns about risks and liabilities there.
Some UKCS assets must be another option, although BP’s Aberdeen office has stated that is not the case. Those assets include West of Shetland fields such as Clair and Schiehallion, for which I believe there would be real interest, notably from the existing partners.
Another possibility is the troubled TNK-BP joint venture in the Russian Federation which, at an average of 940,000 barrels per day in 2009, accounted for the largest share of the group’s oil production.
The timing of any asset sales will obviously be very important. However, at least the company will have about three years to find ways of financing the $20billion escrow fund. Nevertheless, I believe that the BP which emerges for the disaster will be much smaller and more cautious than the current group.
Tony Mackay is MD of economists Mackay Consultants
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