BP (BP)
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Finally, after more than one hundred days of leaking oil, there are signs that the Deepwater Horizon at the Macondo well oil spill saga is drawing to a close – at least the actual oil spill portion. Now it is time for the lawsuits, countersuits, publicity battles and government bureaucratic nonsense to begin in earnest.
For obvious reasons, the British Petroleum (BP: Charts, News, Offers) stock price has taken a walloping over the past four months. At one point the stock was selling for close to $60 per share. In the middle of June, after several failed attempts to stop the leak, the BP stock price fell to around $26 amidst rumors of possible bankruptcy of the company. Currently, BP is trading at close to $40 per share. The question is, where do we go from here?
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Today, British Petroleum made the welcome announcement that the “static kill” operation to stem the leak appears to have succeeded. The news from the well has been increasingly positive over the past two weeks as BP finally hit upon the right technique to address a the difficult problem of a blown oil well 5,000 feet below the surface of the Gulf of Mexico. The efforts to shut down the well culminated after BP pumped so-called heavy drilling mud into the well head for eight hours. Preliminary indications are that the effort has had the desired effect of pushing the oil back down into the reservoir. BP has said that the final step in the process will be the completion of a relief well which will allow more cement to be pumped into the well in order to permanently seal the breach.
Almost all experts agree that the Deepwater Horizon spill is the world’s largest accidental release of oil into marine waters. The spill’s estimated 4.9 million barrels has eclipsed the 3.3 million barrels spilled by a Mexican rig in 1979 in the Bay of Campeche. The accuracy of spill estimates now holds great implications for BP as government regulators begin to seek damages. The minimum fine for a 4.9 million barrel oil spill is close to $5.4 billion, however if it is determined that BP committed gross negligence, the fine could be as high as $21 billion. Throughout the incident, BP has continued to maintain that gross negligence was not a factor in the spill and that it will not be compelled to pay the higher amount. The Environmental Protection Agency on behalf of the US government has indicated that it will pursue the highest fine amount possible even after announcing that at least “three-quarters of the oil from the Deepwater Horizon leak has already evaporated, dispersed, been captured or otherwise eliminated – and that much of the rest is so diluted that it does not seem to pose much additional risk of harm.”
Last week, during the 2Q earnings report, BP announced CEO Tony Hayward would be replaced by Bob Dudley. Furthermore, the company would take a $32.2 billion non-operating charge, posting a loss of $17 billion or $5.42 per share – possibly the worst loss ever for a British company In order to pay for the loss, BP plans to sell off $23 billion in assets over the next two years. The $32.2 billion total includes clean-up costs of $2.9 billion, the funding of a $20 billion escrow fund of which about $9 billion has been paid out to businesses affected by the spill and the remaining balance of the amount seems to be focused on satisfying government fines. In one of his final statements as CEO, Hayward said, “We expect we will pay the substantial majority of the remaining direct spill response costs by the end of the year. Other costs are likely to be spread over a number of years, including any fines and penalties, longer-term remediation, compensation and litigation costs.”
All indications are that BP will survive this crisis, however there are many future financial hits still on the way.
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BP hasn’t been called “British Petroleum” for nearly 12 years – except by Obama when he needed a panto villian.