B&E’s Steven Philip Warner talks to various global oil & climate experts from the likes of Goldman Sachs, Credit Suisse, Standard & Poor’s, Argus Research, JBC Energy & Varda Group to find out what awaits BP’s fate? Will BP, which as recently as two months back was the second most valued oil major in the world, disappear?
He still does. And the main one comes in the name of the bill on the clean-up and litigation, which bears the potential to dent huge holes in BP’s pocket. After setting-up a relief fund of $20 billion, in cooperation with the Fed, many experts are forecasting future outflows that could create suicidal pressures on BP’s bottomlines. London-based Kim Fustier, Global Oil & Gas Analyst, Credit Suisse tells B&E, “These total to $28 billion, $35 billion and $49 billion post-tax respectively. We have cut the FY2010-11 EPS outlook for BP by 13% on average to reflect higher clean-up costs and a higher cost of debt. We have cut two quarters of dividends in the second and the third quarter.” BP also has total committed acquisitions amounting to $8.9 billion (as of mid-April 2010), which will further reduce heavily its surplus cash balances, which stood at $5.3 billion, as at the end of March 2010. There is some relief in the form of committed undrawn credit lines amounting to $5.25 billion, however, most of this will fructify only in late 2011 and 2013.
Till date, BP has spent $1.70 billion in the clean-up act; the liabilities are scheduled to touch $6.44 billion for 2010 and $7.08 billion for 2011 (estimates by Credit Suisse). At current oil price levels and debt-equity ratio of the company ($77 per barrel and 30.8% respectively, as on June 22, 2010), the company can afford to pay up anywhere between $6–$7 billion, without disturbing its balance sheet. In defense of BP’s financial competence, Michele della Vigna, Energy Analyst of Goldman Sachs tells B&E, “BP’s cash balances, operating cash flow generation, and bank lines should collectively be sufficient to meet liquidity needs. BP’s near-term financing needs are covered by committed bank lines of more than $10 billion, which would likely obviate the need for BP to turn to the capital markets at a time of stress.” Sounds like the BP ship is prepared for the next iceberg.
But clear and present hope for Hayward’s big oil ship is like spotting a Rolls Royce in Charlotte’s poor suburbs in Northern Carolina. If oil prices fall even slightly below the $70 billion mark, and if BP maintains its current debt-equity ratio, then it can pay up nothing more than $5 billion per year, without raising more capital. In that case, it will either have to opt for higher debt or equity dilution, and in the worst case – sale of assets.
He still does. And the main one comes in the name of the bill on the clean-up and litigation, which bears the potential to dent huge holes in BP’s pocket. After setting-up a relief fund of $20 billion, in cooperation with the Fed, many experts are forecasting future outflows that could create suicidal pressures on BP’s bottomlines. London-based Kim Fustier, Global Oil & Gas Analyst, Credit Suisse tells B&E, “These total to $28 billion, $35 billion and $49 billion post-tax respectively. We have cut the FY2010-11 EPS outlook for BP by 13% on average to reflect higher clean-up costs and a higher cost of debt. We have cut two quarters of dividends in the second and the third quarter.” BP also has total committed acquisitions amounting to $8.9 billion (as of mid-April 2010), which will further reduce heavily its surplus cash balances, which stood at $5.3 billion, as at the end of March 2010. There is some relief in the form of committed undrawn credit lines amounting to $5.25 billion, however, most of this will fructify only in late 2011 and 2013.
Till date, BP has spent $1.70 billion in the clean-up act; the liabilities are scheduled to touch $6.44 billion for 2010 and $7.08 billion for 2011 (estimates by Credit Suisse). At current oil price levels and debt-equity ratio of the company ($77 per barrel and 30.8% respectively, as on June 22, 2010), the company can afford to pay up anywhere between $6–$7 billion, without disturbing its balance sheet. In defense of BP’s financial competence, Michele della Vigna, Energy Analyst of Goldman Sachs tells B&E, “BP’s cash balances, operating cash flow generation, and bank lines should collectively be sufficient to meet liquidity needs. BP’s near-term financing needs are covered by committed bank lines of more than $10 billion, which would likely obviate the need for BP to turn to the capital markets at a time of stress.” Sounds like the BP ship is prepared for the next iceberg.
But clear and present hope for Hayward’s big oil ship is like spotting a Rolls Royce in Charlotte’s poor suburbs in Northern Carolina. If oil prices fall even slightly below the $70 billion mark, and if BP maintains its current debt-equity ratio, then it can pay up nothing more than $5 billion per year, without raising more capital. In that case, it will either have to opt for higher debt or equity dilution, and in the worst case – sale of assets.
For more articles, Click on IIPM Article.
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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