Investors eagerly await BP's oil spill provision

LONDON (Reuters) - BP Plc will give an estimate for the total cost of its Gulf of Mexico oil spill next Tuesday when it unveils second-quarter profits that, were it not for the spill, would likely have risen 77 percent to $5 billion.

Accounting rules force BP to make a provision for the likely costs related to its leaking Macondo well, which spewed up to 60,000 barrels of crude a day for three months until it was capped last week.

Analysts are predicting BP will face a final bill of between $15 billion and $60 billion.

The wide range reflects uncertainties over the cost of the clean up and compensating those effected, the level of fines and whether BP's partners in the well will share the burden.

"With so many unknowns, BP has quite rightly dodged the question as to the total cost up until now. People will be very interested to see if the provision is more than the $30 billion figure that a lot of analysts are converging on," said Will Riley co-manager of the Guinness Global Energy Fund, which holds BP shares.

BP spent around $3 billion in the second quarter on the containment and clean up operation. This should be more than covered by its earnings.

"Whether balance sheet gearing rises or falls will probably depend on the scale of provisioning rather than cash effects," Gordon Gray, oil analyst at Collins Stewart, said in a note.

However, BP's provision will likely only be a fraction of the total bill it will potentially face.

For one, the estimate of fines included in the provision is likely to be below the maximum possible in law.

Under the Clean Water Act, a polluter faces fines of $1,100 per barrel for a spillage, although this can be increased to $4,300 if the spill is deemed to be due to gross negligence.

BP is expected to assume it will not be found guilty of gross negligence in setting its estimate of likely fines.

This also implies BP's provision assumes its partners will contribute, as proving gross negligence is the only basis on which Anadarko Petroleum and Mitsui will not be liable for their share -- 35 percent -- of the total bill.

Consequently, the charge taken next week is unlikely to be the last. "It will be a permanent feature in the results for some time," Tony Shepard at Charles Stanley said.

CASH PILE

Investors will also be looking for reassurance BP has the firepower to deal with the longer-term liabilities. The group, which agreed a $7 billion asset sale on Tuesday, said last month it had $5 billion in cash on hand and $10 billion in bank lending facilities, while banking sources said the group was also lining up more debt facilities.

The company could further bolster its position next week by outlining plans to raise another $5 billion to $10 billion by securitizing cash flows from its assets, one industry banker said.

"We believe BP is able to fund up to $34 billion of costs and liabilities pretax ($29 billion post-tax) over the next 18 months," analysts at Credit Suisse said in a research note.

Questions about the future of Chief Executive Tony Hayward are expected to resurface, but investors and analysts do not expect him to step down in the near future, although, longer term, Hayward's position is appearing increasingly untenable.

"Providing the cap and relief wells work, we imagine he'll be there for the clean up and will almost certainly then be on his way," a top-10 shareholder said on condition of anonymity.

"The whole operation post explosion has not been managed that well, so somebody has to pay and the CEO and Chairman seem obvious (targets)."

Yet sources close to the company said if BP ditched Hayward before the well was capped and significant progress made on the cleanup, his successor could also tarred by the spill fallout.

BUSINESS BOOMING

Apart from the oil spill, BP's core business is booming.

Last month, refining boss Iain Conn, who was effectively running BP while Hayward was overseeing the oil spill response, said core operations were running "very effectively."

It was a typically understated comment from the Scotsman and a Reuters poll of 11 analysts gave an average forecast of $4.98 billion for BP's underlying net profits, a 77 percent rise on the same period last year.

Higher oil and gas prices and stronger refining margins are expected to boost all the big oil companies, but analysts at Citigroup said BP's predicted result "represents the strongest momentum in the peer group."

The London-based company is also expected to brave a another potential public relations quagmire by revealing it will offset its spill-related costs against tax.

"If you make lower profits, you should pay lower taxes," one source said close to the company said.

(Additional reporting by Cecilia Valente, Quentin Webb and Alex Chambers)