Imagining the Worst in BP ’s Future

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Tony Hayward kreeg in 2007 de leiding over een bedrijf dat jarenlang op
het randje van alle regels had gelopen.
Hij had de huidige situatie alleen kunnen voorkomen door een enorme
reorganisatie, die niet alleen  vele miljarden zou hebben gekost, maar
ook het laten schieten van kansen.
Ik denk dat er weinig topmensen zijn, die zich dat kunnen veroorloven.
Ofschoon Hayward al een 30 jaar meeloopt bij BP, zijn enige werkgever na
te zijn afgestudeerd als geoloog.

Mocht het ook bij het Atlantis platform misgaan, en dat is bepaald niet
uitgesloten want de operations daar varen kennelijk blind op de ervaring
van de werknemers, dan wordt de keuze natuurlijk voor BP gemaakt. De
omstandigheden dwingen het dan af.

Groet / Cees

June 7, 2010
Imagining the Worst in BP’s Future
http://www.nytimes.com/2010/06/08/business/08sorkin.html
By ANDREW ROSS SORKIN

It seems unthinkable, even now, that the disastrous oil spill in the
Gulf of Mexico could bring down the mighty BP. But investment bankers
get paid to think the unthinkable — and that is just what they are doing.

The idea that BP might one day file for bankruptcy, particularly as part
of a merger that would enable it to cordon off its liabilities from the
spill, is starting to percolate on Wall Street. Bankers and lawyers are
already sizing up potential deals (and counting their potential fees).

Given the plunge in BP’s share price — the company has lost more than a
third of its value since Deepwater Horizon blew — some bankers and
analysts say BP is starting to look like takeover bait. The question is,
who would buy BP, given its enormous potential liabilities?

Shell and Exxon Mobil are both said to be licking their chops. And
already, flinty legal minds are dreaming up scenarios in which BP would
file a prepackaged bankruptcy and separate the costs of the cleanup —
and potentially billions of dollars in legal claims — into a separate
corporate entity.

Tony Hayward, BP’s chief executive, has insisted that his giant will
weather this storm. BP is indeed a money machine: it turned a profit of
nearly $17 billion last year.

“The strength of cash-flow generation in recent quarters has provided us
with a balance sheet that allows us to fully take on the responsibility
for the Gulf of Mexico response,” Mr. Hayward told employees last Friday.

But that hasn’t stopped the deal crowd from blue-skying potential
outcomes. Here is some of the math:

BP’s costs for the cleanup could run as high as $23 billion, according
to Credit Suisse. On top of that, BP could face an additional $14
billion in claims from gulf fisherman and the tourism industry. So while
conservative estimates put the bill at $15 billion, something
approaching $40 billion is not out of the question. After all, little
about this spill has turned out as expected.

The company has about $12 billion in cash and short-term investments,
but there is already a debate about whether it should cut its dividend
out of fear that it could run out of money. Of course, it could sell
assets or seek loans, which in this environment is still not that easy.

But all those numbers don’t account for the greatest possible threat: a
jury verdict against BP. Such a verdict might push the cost of the spill
into the hundreds of billions. If that happened, even BP might buckle.

This outcome might seem far-fetched right now. But on Wall Street
bankers have already coined a term for it: “the Texaco scenario.”

In 1987, Texaco was forced to file for Chapter 11 because it could not
afford to pay a jury award worth $1 billion to Pennzoil. That award had
been knocked down by a judge from a whopping $10.53 billion. (Pennzoil
successfully sued Texaco for “jumping” its planned merger with Getty
Oil, in part, by moving the case to local court near its headquarters.
The jury awarded triple damages.)

Imagine the BP case playing out in a Louisiana courtroom, against the
backdrop of an oil-choked local economy, high unemployment and an angry
public. How high can you count?

Under the Oil Pollution Act of 1990, BP’s liability for economic
devastation — above the cost of the cleanup — is capped at $75 million,
a number Mr. Hayward has already said he plans to blow through. But if
BP is found to have violated safety regulations, which seems likely,
that cap becomes irrelevant.

That’s not to say that BP won’t fight a huge judgment against it. After
the Exxon Valdez spill, Exxon fought a $5 billion fine for punitive
damages for two decades. It won. The fine was cut down to $4 billion,
then to $2.5 billion. The case eventually made it to the Supreme Court,
which found that Exxon’s actions were “worse than negligent but less
than malicious,” and vacated the fine. The judgment limited punitive
damages to the compensatory damages, which were calculated as $507.5
million.

“There are so many imponderables over whether its liabilities would be
capped or not,” David Buik of BGC Partners in London wrote of BP. “If
BP’s share price continues to fall, it could become a takeover target.”

Given that Shell and Exxon have billions in cash on hand and market
values that easily exceed BP — Exxon is twice the size — bankers say now
is the time to make a deal, as long as an acquirer can find a way to
separate the legal exposure. That, of course, is a big ‘if.’

There are many people — besides BP — who think even discussing the
possibility of a bankruptcy or takeover is silly. But looking out a few
years, that may be BP’s best, last hope.

“Even with a prepackaged bankruptcy, BP’s brand is permanently tainted,”
said Robert Bryce, a senior fellow at the Manhattan Institute and author
of “Power Hungry: The Myths of ‘Green’ Energy and the Real Fuels of the
Future.” Yes, BP is financially sound now. It is unlikely to go bust
near term, he said.

“Instead, BP will spend the coming decades circling the drain, mired in
endless litigation, its reputation irreparably damaged, and its finances
weakened,” Mr. Bryce said.

That, if you believe the bankers, is the optimistic outcome.

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