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BP Faces Bleaker Prospects If ‘Top Kill’ Fails to Stanch Spill



BP PLC will try again Wednesday to plug the broken well in the Gulf of Mexico, and if this latest maneuver fails, the company’s future could get bleaker.

BP aims to begin injecting heavy drilling fluids into the well early Wednesday, a procedure called a “top kill,” after which cement will be pumped in to stop the flow of crude.

Company executives give the operation, which has never been attempted at such depths, a 60% chance of success. Obama administration officials are gloomier, giving it a 10% chance of plugging the leak.

If this procedure fails, the company and millions of Gulf Coast residents could have to wait until August for a relief well to be finished. The prospect of oil gushing into the gulf for another two to three months has spooked investors, who have wiped around $30 billion off BP’s market value since the Deepwater Horizon drilling rig caught fire and sank last month.

Analysts say BP’s plummeting share price reflects a worst-case scenario: that oil continues to spew unabated into the gulf, driving up clean-up costs and potential liability, and threatening BP’s hold over some $37 billion of Gulf of Mexico leases.

BP has already spent $760 million trying to mitigate the spill, including grants to Gulf states and claims paid to cover some business losses. It also faces billions of dollars in potential liabilities and federal penalties.

Partly thanks to fears about the size of the final bill, BP now trades at a 20% discount to its rival, Royal Dutch Shell PLC.

“Generally speaking, the period of worst share price performance is when the level of uncertainty is at its highest,” said Ivor Pether, a fund manager at Royal London Asset Management and a BP shareholder. “And there is currently a great deal of uncertainty about whether the top kill will work.”

In shareholder presentations over the past few years, BP has continually boasted of its prowess at producing oil in deep water, as well as other frontier environments. As its mature oil fields in places like the North Sea and Alaska decline, it has replenished its reserves by aggressively accumulating leases in the deep, coastal waters off the shores of Angola and Brazil, and especially in the Gulf of Mexico. The company is now the largest producer in the Gulf, with 550 leases in waters deeper than 1,200 feet and some 420,000 barrels of oil and gas per day of output.

Yet its deepwater strategy could be imperiled by any regulatory crackdown on the company arising in response to the Deepwater Horizon disaster. U.S. Interior Secretary Ken Salazar warned Sunday that BP faced an “existential crisis,” and that its “life is on the line.”

For the moment, most analysts remain sanguine about BP’s ability to weather the storm; 34 of them have “buy” recommendations on the stock, eight have “hold” and only one has a “sell.”

BP makes a profit of around $6 billion a quarter and had $6.8 billion of cash on its balance sheet at the end of March. It easily has enough money coming in to cover dividend payouts and capital spending, as well as the costs of dealing with the oil spill. With its gearing ratio at a comfortable 19%, it has more than enough headroom to borrow.

Jason Kenney, an oil analyst at ING Bank, expects BP to make provision of $5.1 billion to cover oil spill-related liabilities in the second quarter of this year, which could be drawn down over 5 years. That, he said, would take only 12 pence off his target price for BP shares of 725 pence, rising to 25 pence if the clean-up cost doubles to $10 billion.

However, that could change if all efforts to contain the spill fail and the oil continues to flow until the relief well kicks in, unleashing a massive political backlash against BP.

“The risk for BP is that the U.S. government will constrain BP’s activities,” said Will Riley, co-manager of Guinness Atkinson Global Energy Fund and a BP shareholder. “Deepwater is very important to their future growth.”

Mr. Riley, however, thinks it’s “highly unlikely” that the Obama administration will pull BP’s Gulf licenses or withdraw its permits. BP’s oil output in the Gulf is “too important for the U.S. to give up on, in terms of energy security,” he said.

Write to Guy Chazan at [email protected] and Neil King Jr. at [email protected]

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