BP's $70 billion whipping - "might be the subject of a takeover"

[1776Forever]

BP's $70 billion whipping
By Steve Hargreaves, Senior writer
June 2, 2010: 4:46 AM ET

http://money.cnn.com/2010/06/01/news/companies/BP_analysts/index.htm

NEW YORK (CNNMoney.com) -- Despite the sharp fall in BP's share price following the company's inability to cap a leaking well in the Gulf of Mexico, most analysts say the selloff is overdone.

BP shares sank nearly 15% Tuesday after the company's latest attempt to seal the leaking Gulf oil well failed over the weekend. The selloff accelerated just before the closing bell, when U.S. Attorney General Eric Holder announced a criminal probe into the spill.

Since the accident happened April 20, which resulted in 11 deaths and an oil leak of up to 19,000 barrels per day, BP shares have fallen nearly 40%, wiping out nearly $70 billion in shareholder value. Before the accident the company had a market capitalization of nearly $183 billion. Now it's just below $115 billion.

Investors are concerned the clean up costs, lawsuits, and added restrictions from the spill, the worst in U.S. history, will sap BP's earnings potential.

Plus, like most big oil projects, BP is self-insured for the operation, so all of the costs of the cleanup and damages will fall on its shoulders.

No one knows how much the spill will eventually cost BP. Estimates have ranged from $3 billion to $25 billion - many fall somewhere in the middle. As of Tuesday BP said it has spent just shy of $1 billion on the accident...

"Anything BP does in the future will be under the microscope, and that will drive costs higher," he said.

Youngson also brought up another possibility that most other analysts have not openly talked about to date: That BP stock could get so cheap it might be the subject of a takeover.

He thinks if the stock falls much below $30 a share, BP will become a target. Shares traded around $38 Tuesday afternoon.

'If the share price continues to fall," he said, "other companies may see this for the bargain it will be."

..........

I posted yesterday about the hundreds of lawsuits being filed and what would happen if BP gets to the point where they say they can't make their obligations and was laughed at. I don't think I am being laughed at today! Congress needs to act immediately to make sure the money is there to repay those that are going to be affected by this tragedy! The lists just keep getting longer!

:argh:

[rpannier]

1. Like to have seen the post

Can't figure out why people scoffed
There are a many ways for companies to avoid their debt obligations

[1776Forever]

2. Here is the article I referenced: BP hit by avalanche of compensation claims

BP hit by avalanche of compensation claims over US oil spill
Business owners claim company ignored evidence of broken seal on Deepwater Horizon well
Andrew Clark in New York guardian.co.uk, Monday 31 May 2010 18.52 BST Article history

http://www.guardian.co.uk/business/2010/may/31/bp-compensation-claims-us-oil-spill

While work continues to try to staunch the flow of oil into the Gulf of Mexico, an avalanche of class action lawsuits is descending upon BP in courthouses from Texas to Louisiana, Alabama, Mississippi and Florida.

The suits include claims for loss of earnings, loss of enjoyment or property, or for bereavement suffered by families of the 11 workers killed when BP's Deepwater Horizon rig caught fire and sank on 30 April.

BP has pledged to meet all "legitimate claims". But after the failure of the company's attempted "top kill" fix at the weekend, financial analysts fear the cost could become astronomical if oil continues to flow into the Gulf for weeks to come.

Estimates of the potential cost of the spill vary widely. Including the clean-up, compensation and fines, UBS has suggested BP could face a bill of $12bn (£8.25bn). Jason Kenney, an analyst at ING Commercial banking, increased his estimate of the cost from $5.3bn to up to $22bn if the spill continues until August....

Mark Lanier, a Houston-based lawyer for one group of plaintiffs, said the litigation against BP would make the 1989 Exxon Valdez oil spill in Alaska look like "an oil leak in a car".

"Honestly, this is a monstrosity, it's a tragedy," he told Texas Lawyer magazine. He said it might become the biggest legal battle in US history. "This is going to be, in my estimation, the largest tort we've had in this country."

[DrDan]

3. if there was a takeover, would liabilities disappear?

[1776Forever]

4. Good question! I doubt it but would they be limited? Anyone know? n/t

[DrDan]

5. if not, it would be insane to get anywhere near a takeover

[Paper Roses]

6. If the liabilities do not disappear, why would another company

want BP? I'm not questioning your thought. Just curious. With the billions of dollars of cost in all this clean-up, even at below $30.00 a share, would it be any kind of a bargain?

Who assumes the responsibilities with the legal proceedings?

[1776Forever]

7. It came from the quote in the article by Douglas Youngson, Oil analyst:

"In England, where BP (BP) is based, 38 analysts have a buy rating on the stock and eight have it as a hold. Only three recommend selling it, said Douglas Youngson, an oil analyst at Arbuthnot Securities, a London-based investment bank.

Beyond the clean up costs and lawsuits, there's also possible damage to BP's reputation. This is, after all, the company that branded itself an environmentally friendly oil firm, buying wind farms and solar arrays and adopting the slogan "Beyond Petroleum."..

Youngson also brought up another possibility that most other analysts have not openly talked about to date: That BP stock could get so cheap it might be the subject of a takeover.

He thinks if the stock falls much below $30 a share, BP will become a target. Shares traded around $38 Tuesday afternoon.

'If the share price continues to fall," he said, "other companies may see this for the bargain it will be."
"

[Statistical]

8. No. (and info on why another company might still want to buy them).

When you take over a company you assume everything, equity, debt, liabilities, etc.

BP is trading close to the cost of their assets right now. If stocked declined another 20% the shares would be worth less than the company "parts". Essentially a competitor could buy BP for $0.70 on the dollar.

Now liability still exists but how much is it going to be? Big question but I am sure big accountants at big oil companies are working hard on it. Right now liability cap is only $75M. If that isn't raised well that is a "shield". Raising the cap isn't a done deal, even Obama is giving little service to it. Still lets say it is raised most likely it will be raised to $10B. Lttle known fact is that BP only owns 60% of the well so their share is $6B. Say long term cleanup ends up costing $10B (roughly 10x Valdez). Mitigation another $3B (spent about $1B total). Fines another $5B.

So the sum of hard costs to BP are:
Mitigation: about $1B so far for 42 days. Roughly $3B total if leak continues to August.
Long Term Cleanup: $10B? largest uncertainty. However $10B would be roughly 10x Valdez.
Fines: $5B ($4300 per barrel, 12K bpd, 90 days)
Liability: $6B (60% of yet to be raised $10B cap)
Total: $24B?

Now that will be partially offset by insurance. BP like any major has extensive insurance. How much? $10B? $20B? capped at % of total? Who knows but it is unlikely BP will pay the entirety of the costs.


So erase $24B from BP balance sheet. Maybe it is $30B?, Maybe it is $50B? However if the stock keeps declining at some point even removing $24B+ from BP balance sheet it will still be an attractive takeover target.

A company like Chevron doesn't need the brand, they just want the assets. Rebrand the BP stores in the US to Chevron stores.

[1776Forever]

9. Thank you for the reply. Even I can understand that one Statistical. n/t

[1776Forever]

12. I would like your opinion on the fact that BP is self-insured. From the article quote below:

"Plus, like most big oil projects, BP is self-insured for the operation, so all of the costs of the cleanup and damages will fall on its shoulders."

[Statistical]

14. That seems to conflict with this...

Oil Spill May Cost Insurers $1.5 Billion in Claims
http://www.bloomberg.com/apps/news?pid=20601087&sid=auMyhffF2kHU

Lyods of London (insurance company) puts number on their cost to BP spill @ $600M to $800M
http://www.cnn.com/2010/BUSINESS/05/27/bp.spill.lloyds.insurance/index.html

Still seems to be conflicting reports and the insurance amount seems to be small relative to overall cost $1.5B vs $25B+ so to be conservative one could assume BP is nakedly uninsured.

The other thing to remember is BP only owns 60% of the well. 40% of potential profits (and in this case losses) belong to 2 other parties.

Here is one such party.
http://www.forbes.com/2010/05/04/energy-news-marathon-oil-anadarko-earnings-marketnewsvideo.html

Ignore the number (in terms of dollar costs) way out of date since spill has continued a month since then but looks like Andarko is going to be on the hook for 25% of damages. BP is handling cleanup but my guess is they are going to push 25% of total bill onto Anadarko.

Anyways it is complex. Multiple parties, multiples insurance contracts, multiple outcomes.

The large issue is IF BP keeps declining you reach a point where assets owned by BP are worth more than the shares and then liability or not it is like getting couple hundred billion worth of oil assets on sale. Exactly where that number is really depends on how the situation works out and what other oil companies ultimately think it will cost BP (and thus them if they buy BP).

[1776Forever]

16. Fascinating data! I had no idea of all of this as I am sure a lot of others don't. Thank you! n/t

[On the Road]

11. In General, No

Liabilities would be transferred to the new parent.

There is, however, this, which I don't quite understand. Normally subsidiaries don't go bankrupt by themselves.

[1776Forever]

13. This is what I am talking about! Few people seem to know about that! Thanks for posting!

This is an article from 2002 but it shows how bankruptcy courts are used to settle class action suites!

.....

Article: Halliburton Follows Denver Producer's Method of Dealing with Asbestos Claims
By Eric Berger, Houston Chronicle Knight Ridder/Tribune Business News

http://www.highbeam.com/doc/1G1-95588091.html

Dec. 19--Halliburton's plan to use the bankruptcy courts to help settle billions of dollars in asbestos claims is an accepted practice used by solvent companies settling such huge class actions.

In this case, Halliburton is trying to refine the process to allow its Kellogg Brown & Root subsidiary to get through the process within 90 days of when it files next spring.

Halliburton will be following in the footsteps of Johns Manville, a Denver-based producer of building materials that, in the face of a staggering number of asbestos claims, filed for bankruptcy in 1982.
:kick:

[DrDan]

18. my gosh . . . so KBR can file bankrupcy and settle all liabilities - with apparently no other

impact.g on Halliburton?????

What a screw job. Is there no end to this corporate screwing of America?

[On the Road]

19. I Don't Know the Circumstances

and as a result am not sure I completely disagree with the practice.

Companies should not be able to profit from taking actionable practices through a dependent company and erasing it by allowing it file for bankruptcy and continue operations. However, it would mitigate the situation if (1) the subsidiary were originally a separate company that was acquired later, and/or (2) it was not a wholly owned subsidiary, meaning that the parent had a stake in a company with other independent owners.

I seem to remember Halliburton acquiring an asbestos company in the 80s (perhaps Manville) which was hit with massive asbestos class action suits which eventually threatened Halliburton.

Allowing the subsidiary to declare bankruptcy in this case would wipe out all the original stockholders and managers and provide something for the creditors, including the class action claimants. That would seem to satisfy the punitive effect of the lawsuit. I don't have an opinion and haven't investigated it.

In the case of BP, it might depend on how the corporation is structured, and whether the operations responsible for the Gulf leak could be separated from the main corporation. Perhaps there are some international issues since BP is organized in and operates in many different countries and AFAIK is headquarted in the UK. It would seem like a stretch to try to separate the Gulf drilling operation from the rest of the company, but I wouldn't put it past BP to try.

[Scuba]

10. Nationalize now....

...use future profits to clean up the mess and compensate the victims.

[Spoonman]

15. Who will compensate the victims of nationalization?

Your "Hugo" mentality does not take into account the millions of average american citizens that have oil company stocks in their retirement portfolios.

Lack of over-site, not control was the issue here.

Your knees will feel better after you stop jerking them.

[Scuba]

21. You pay them off with future profits, after all the business expenses are covered...

Business expenses meaning cleanup, compensation, etc. You could have a program where smaller, less wealthy stockholders receive something in the short term to keep them whole.

Otherwise, you're just privatizing profits and socializing losses.

[1776Forever]

17. Some DUer's are repeatedly unrecing this post. DLCers? I heard Harold Ford this morning on M Joe

saying that President Obama should NOT look into criminal charges (?) - DLC influence sounds like to me!

[Javaman]

20. Right there with you.

I posted a month ago, that this could spell the end of BP and that they would declare bankruptcy before this all ended.

I got piled on by the hate mob telling me I was crazy, that it was impossible for such a huge corp with billions in assets to file for bankruptcy, blah blah blah.

I never claimed to have a crystal ball, but I certainly saw the writing on the wall.

Everyone was using exxon as an example, the tables have turned. If anything, we don't have a repuke bullshit artist in office to cover for the oil corps. This certainly isn't a remote part of Alaska, either. This is right in our face. Hard to make it go away.

I think a year from now, BP will be a vastly different entity.

[1776Forever]

22. Thanks - You probably saw this but I am posting it again to further the case:

This is an article from 2002 but it shows how bankruptcy courts are used to settle class action suits!

.....

Article: Halliburton Follows Denver Producer's Method of Dealing with Asbestos Claims
By Eric Berger, Houston Chronicle Knight Ridder/Tribune Business News

http://www.highbeam.com/doc/1G1-95588091.html

Dec. 19--Halliburton's plan to use the bankruptcy courts to help settle billions of dollars in asbestos claims is an accepted practice used by solvent companies settling such huge class actions.

In this case, Halliburton is trying to refine the process to allow its Kellogg Brown & Root subsidiary to get through the process within 90 days of when it files next spring.

Halliburton will be following in the footsteps of Johns Manville, a Denver-based producer of building materials that, in the face of a staggering number of asbestos claims, filed for bankruptcy in 1982.

[Javaman]

25. Yup.

I call it the, "pulling the rip cord" solution.

Anything to save the corp and screw the people.

[AngryAmish]

23. Buy it, change the name, install new management, profit.

[blindpig]

24. Expropriate without compensation now, while it's still there

n/t

[Divine Discontent]

26. not sure how it could play out, but it comes down to how much damage they will be ordered

to pay. I would expect their stock value to be half if this continues to flow for another 2 months. That would make them ripe for a takoever, if they even would be allowed to do such, legally.