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Potential scenarios facing BP

SCENARIOS-The future for BP after the oil spill

By Tom Bergin

June 3 (Reuters) – BP’s (BP.L) (BP.N)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 

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. [ID:nN02139553]

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.

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. [ID:nN02139553]

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. [ID:nWAT014519]

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 (XOM.N), Royal Dutch Shell (RDSa.L) and Chevron (CVX.N) 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 sho

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.

REUTERS ARTICLE

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