The Woes on Corporate BP are mounting (FT Alphaville)

$47bn and counting

Posted by Neil Hume on May 25 09:38.

Canaccord Genuity is providing some interesting commentary on BP and the Gulf of Mexico oil spill. And it goes some way to explaining why the share price of what was the biggest company in the FTSE 100 keeps heading south in spite of numerous “buy” recommendations from City analysts (and the fact that it now yields more than two times a 10-year gilt).

First, the broker picks up on reports that the US Environmental Protection Agency (EPA) is considering whether to bar BP from government contracts and end its drilling in federally controlled fields.

* BP is the largest oil and gas producer in the Gulf of Mexico and operates some 22,000 oil and gas wells across United States, many of them on federal lands or waters. They produce 39 percent of the company’s global revenue from oil and gas production each year – $16 billion.

* The EPA said in a statement that, according to its regulations, it can consider banning BP from future contracts after weighing “the frequency and pattern of the incidents, corporate attitude both before and after the incidents, changes in policies, procedures, and practices.”

* Federal law allows agencies to suspend or bar from government contracts companies that engage in fraudulent, reckless or criminal conduct. The sanctions can be applied to a single facility or an entire corporation. Government agencies have the power to forbid a company to collect any benefit from the federal government in the forms of contracts, land leases, drilling rights, or loans.

Canaccord has also been examining BP’s liability risk from a legal standpoint. And again the news is not good – there is no financial cap on criminal liability.

But more importantly:

This issue has not overtly surfaced in the press yet, and is another major risk area for BP. BP’s current estimates are that 5,000 barrels of oil are being lost per day from Mocando although independent estimates are much higher, ranging up to 115,0000 (although we think this flow rate would be physically impossible). Somewhere in between 5,000 and 50,000 is most likely.

Now, the civil penalties are: $32,500/day per violation, or $1,100 per barrel. If gross negligence is proved this rises to $4,300/barrel.

This tables shows how this penalty can escalate astronomically. The penalty however, generally ends up being smaller than the statutory maximum since the EPA has lots of flexibility and will take into account compliance and co-operation in dealing with the disaster. Related lawyers will currently be beavering away attempting to assess the range of damages.

So, the mid range total is almost $26bn. To put that figure in perspective, roughly $47bn has been knocked off the BP share price since the disaster was announced on April 20th. The market, therefore, seems to be pricing in something close to the worse case scenario, which does seem harsh.

However, Canaccord notes that BP makes a third of its profits in the US and its Gulf of Mexico activities are the highest margin.

BP is obviously in the most vulnerable position of the parties involved – a net effect of the ongoing disaster besides financial liability could be the risk that no further GoM leases are awarded to them in the future and even a retroactive removal of the Macondo licence.

Which would leave BP dependent on its low growth downstream operations.

And that probably does help explain why shares are trading below 500p.

Related links:
£19.5bn and counting – FT Alphaville
BP told to rein in use of chemicals – FT
Anger at White House over oil spill role – FT
BP offers first thoughts on causes of the Deepwater Horizon disaster – Energy Supply

This entry was posted by Neil Hume on Tuesday, May 25th, 2010 at 9:38 and is filed under Uncategorised. Tagged with bp, canaccord, Environmental Protection Agency.