Scenarios: The future for BP after the oil spill

HOUSTON Thu Jun 3, 2010 8:34am EDT

HOUSTON (Reuters) - BP's oil spill in the Gulf of Mexico has become the worst in U.S. history, prompting speculation about the future of the company and its chief executive, Tony Hayward.

Here are some potential scenarios facing BP:

BP RUNS OUT OF CASH - UNLIKELY

BP and the White House have said the oil giant has the financial muscle to cover the cost of cleaning up the oil spill and compensating those affected.

All analysts consulted by Reuters agree on this, and that the key determinant of how much it does finally cost depends on how long the oil continues to flow.

Analysts and investors have started to factor in that the spill lasts until August, when a relief well is expected to be completed. The relief well would end the spill even if earlier efforts to cap the ruptured well have failed.

BP's market capitalization has fallen by around $65 billion since the Deepwater Horizon rig sank on April 22 after exploding two days earlier, unleashing a torrent of oil into the Gulf of Mexico.

Most analysts believe this more than factors in the total cost to BP.

"It's not going to be anything in that ball park," Alex Morris, oil analyst at Raymond James in Houston said.

Estimates for the total cost start at around $5.3 billion, an estimate from Dutch bank ING, assuming the current effort to fit a cap on the well to capture the oil works.

However, estimates run to up to $37 billion -- the forecast from investment bank Credit Suisse.

As costs, especially those for damages, will be absorbed over a period of years, BP is seen as able to handle them.

The company generated cash of $7.7 billion from operating activities in the first quarter. Even after capital investment of $3.8 billion, it had $3.9 billion of free cash.

Most analysts believe the company can foot the bill without cutting its dividend or raising debt levels.

However, Credit Suisse said if its $37 billion estimate is accurate, the company can only maintain its dividend by raising its gearing ratio by 10 percentage points, something it may not wish to do.

And even if BP can afford to maintain its dividend, it may cut it as a political gesture to bolster its flagging reputation. Democratic Senators Charles Schumer and Ron Wyden said on Wednesday BP should cut its dividend until the full costs for cleaning up the spill can be calculated.

BP, which owns 65 percent of the leaking well, its partners Anadarko Petroleum, which owns 25 percent and Japan's Mitsui & Co, which owns 10 percent, are legally liable for the clean-up on the basis of their shareholdings. BP has undertaken to cover all damages itself.

CEO Hayward said in an interview with Britain's The Daily Mail newspaper on Wednesday that clean-up costs could hit $3 billion if the leak continues until August.

This is based on BP's estimate of around $950 million spent in the first 41 days after the explosion.

However, Credit Suisse estimated in a research note on Wednesday that clean-up costs could total $15-23 billion. Other analysts put the number as low as the $2 billion estimated by Panmure Gordon's Peter Hitchens.

BP has agreed to compensate all those affected by the spill for all legitimate costs, even though under the law BP and its partners are only liable to pay up to $75 million. BP has undertaken to pay this money itself, rather than in conjunction with its partners, so the full liability may fall to it.

BP has offered no estimate but Hitchens at Panmure said on Wednesday he estimates compensation claims will be $10 billion. Credit Suisse estimates this at $23 billion.

BP BECOMES A TAKEOVER TARGET - UNLIKELY

The collapse in its share price means BP could become a takeover target, Dougie Youngson, oil analyst at brokerage Arbuthnot said on Tuesday.

However, most analysts do not expect this to happen.

Exxon Mobil, Royal Dutch Shell and Chevron are the only fully publicly traded oil companies larger than BP and deemed financially strong enough to buy it.

The U.S. government blocked the takeover of Asia-focused U.S. oil company Unocal by China's CNOOC for strategic reasons, so most analysts doubt it would allow BP -- the largest oil producer in the Gulf of Mexico -- to be taken over by a state-backed oil company.

Antitrust issues could arise over BP's refineries if it were acquired by Exxon, Shell or Chevron, Alex Morris said. This could force the sale of the refineries but in the current depressed refining environment that would be difficult.

BP's significant U.S. gas production assets could also cause regulatory problems for any of the above, Jason Kenney at ING said.

However, the biggest barriers to an acquirer making a move are the unknown liabilities that arise from the spill.

"It would be hard to see one of the other supermajors taking on such an unknown liability," Raymond James's Morris said.

Similarly, selling of BP piecemeal may not attract buyers because the individual parts would still be liable for the spill.

Washington may also block any deal seen to strengthen anyone in the oil industry.

"The last thing that President (Barack) Obama needs today is "bigger oil," ING's Kenney said in a research note.

CEO HAYWARD LOSES HIS JOB - UNLIKELY, FOR THE MOMENT

Inevitably, there have been questions over whether Hayward should stay. He told the Daily Mail "...it would be ridiculous to resign at this point" and most analysts have defended the CEO's position.

John Hofmeister, former president of Shell Oil Company, Shell's U.S. unit, and author of "Why We Hate the Oil Companies," told Reuters it was unreasonable to blame the CEO.

"Ultimately the CEO is accountable and responsible ... but the individual on the rig may have a made a bad judgment."

Investors had been happy with Hayward's efforts as CEO. In the almost three years before the Deepwater Horizon rig sunk, he had improved refinery operations, boosted oil production and cut a lot of management overheads.

"People were happy with him -- he had done a good job turning around BP," Alex Morris said.

So far, investors and analysts seem to be backing Hayward.

However, documents and testimony submitted to government investigations into the incident have prompted some in Washington and Louisiana to question BP's decisions about the drilling of the oil well.

Hayward took up his role promising to standardize and streamline the way BP built facilities and drilled oil wells. If the structures he put in place are deemed to have led to any decisions that contributed to the accident, then the CEO's position could come under pressure.

BP IS BARRED FROM DOING SOME BUSINESS IN THE U.S. AT LEAST TEMPORARILY - SOMEWHAT LIKELY

Some commentators have called for BP to be banned from drilling in the United States, which would seriously damage the company's business given that 40 percent of its assets are in the United States and it depends on the country for its growth plans.

Analysts are divided on whether some debarment is likely.

"There are going to be heavy fines. The regulator is going to be tough on them getting permits but all companies have to be treated by the rules. This isn't Venezuela," said Morris.

However, under federal law BP would have to be banned from government contracts for a period of time if convicted of a criminal offense under the Clean Water Act. The company could also be barred from contracts if civil judgments are entered against it for violations of environmental laws.

BP has already faced partial bans on receiving federal contracts because of past violations of U.S. laws. After the pipeline leaks at its Prudhoe Bay Unit in Alaska and a fatal explosion at a Texas refinery, the company was ineligible to receive federally funded contracts for services from those two facilities.

The company had been negotiating with the U.S. Environmental Protection Agency over those bans but those talks were halted after the oil spill in the Gulf of Mexico.

While BP could face such a penalty in the latest oil spill, one law professor and private practitioner, Anthony Sabino, noted that there were not a lot of other oil producers so it might only be a short-term debarment.

That could be viewed as a punitive and politically motivated action, but regardless such a ban would likely "be a short-term hit and not substantial," he said.

BP TO FACE FINES AND PENALTIES - LIKELY

In addition to facing billions of dollars in costs from the economic liability and damages, BP could also potentially face billions of dollars in civil and criminal penalties if the Justice Department's investigation finds wrongdoing.

Some legal experts have said that proving some criminal charges may be more difficult because it requires showing intent, negligence or other malfeasance. However, some environmental laws have simple criminal violations, including the one banning harm to migratory birds.

For each barrel of oil that prosecutors can prove has spilled into the Gulf, BP could be fined $1,100 or as much as $4,300 if they are able to prove negligence was the cause.

Prosecutors could use estimates from a team of scientists and experts who found between 12,000 barrels per day and 19,000 bpd are flowing from the broken well. That could equal as much as $81.7 million in fines per day at the high end. With 44 days of oil spewing from the well, that would equal $3.6 billion as of Wednesday.

Additionally, U.S. laws protect endangered species and migratory birds, with fines of up to $25,000 per violation. Already more than 100 birds have been found oiled or dead, according to the Unified Area Command for the spill response efforts. There are also criminal fines associated with such violations, which could be as much as $50,000.

If other companies are also found to be responsible for the spill as well, the penalties could potentially be imposed on each violator. In some cases, most significantly the Exxon Valdez spill in 1989, companies try to negotiate a settlement with the federal government, as is expected with BP.

Two years after the Valdez spill, Exxon settled U.S. civil and criminal charges in a plea agreement that included just over $1 billion in penalties, damages and restitution.

At the time, the $125 million in criminal penalties was the largest of its kind while $900 million went to reimburse federal and state governments for responding to the spill and later restoration projects. The federal government and state of Alaska in 2006 sought another $92 million from Exxon, however that request has not been resolved.

BP TO FACE GROWTH HEADWINDS IN THE FUTURE - LIKELY

BP's targets for expanded production will become tougher to achieve following the oil spill, and its financial performance will suffer from higher costs -- even after spill costs and fines are paid.

BP said earlier this year it was targeting oil and gas output growth of 1-2 percent over the medium term. This plan relies heavily on BP's U.S. projects and especially the Gulf of Mexico, where it was leading the push into ever-deeper waters.

The dislocation caused by dealing with the spill, including the diversion of vessels from other fields means BP will face a particular challenge in keeping its drilling plans on track. A moratorium imposed by Obama on new deepwater drilling after the spill will also slow development plans at BP and across the industry.

Even when the oil spill has been dealt with and the drilling moratorium is lifted, BP's damaged reputation is likely to mean more scrutiny from regulators than other companies, analysts said.

This means it will likely take longer than it would have expected in the past to bring fields to production.

"The Gulf of Mexico position was much heralded by management as a differentiated position for BP relative to its peers only 12 months ago ... the full monetization of these assets is likely to take longer," Morgan Stanley oil analyst Theepan Jothilingam said in a research note.

Lower-than-expected production would hit BP's financial performance but in addition to this, higher costs could weigh on BP's profits. Analysts at Bernstein estimated the company could face 10 percent higher operating costs in the United States after the spill, in part due to the need to impose tougher safety standards.

(Additional reporting by Jeremy Pelofsky and Ayesha Rascoe in Washington; Editing by Frances Kerry and Eric Walsh)

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