BP's Eventual Bankruptcy Certain
Source: James West, Midas Letter (6/25/10)
"Either way, shareholders and taxpayers alike will burn."
Here's some food for thought in support of my prediction. I also caveat that statement with the possibility that a 'merger' or 'buyout' will be forced and negotiated out of public view to offset political carnage. Either way, shareholders and taxpayers alike will burn.
What they're still touting as the 'worst environmental disaster in U.S. history' is quickly growing into the worst environmental disaster in the history of humanity. With the unprecedented scale and scope of this astonishing catastrophe, BP will likely not survive. There are reasons for this, which are not currently part of the mainstream analysis. But the mainstream is reactive and, to some degree, compromised by conflicted cross ownership of shares in both big oil and big media.
When will the actual rate of flow be known? At this point, it yet grows weekly.
What will be the long-term effect of such a severe and unprecedented change in ocean chemistry within the Gulf? Might this trigger some sort of domino effect that can spread to the rest of the world's oceans? Will the Gulf become a pelagic desert?
These are questions that lurk along the outer reaches of a lot of minds of late. With BP now acknowledging that it will likely be at least August before the leak is brought under control, its share price is plummeting—and that makes the 100-year old company both a takeover target and a bankruptcy concern.
Never mind any semblance of moral imperative—this disaster has already upset the entire offshore drilling industry; and with the clamor growing around the world, you can bet that serious—and expensive—legislation curbing the industry's growth is inevitable. Besides banning offshore drilling off Alaska and the entire eastern seaboard, which has already happened, the new rules governing the procedures for exploration and extraction of offshore hydrocarbon resources are going to make the commodity and the final product more expensive. We are, obviously, going to see new safety requirements and probably requirements for substantial contingency funds.
But it's the legal and financial exposure that BP is going to be desperately seeking ways to avoid. It's safe to say a good portion BP CEO Tony Hayward's days are devoted to ducking responsibility for the event. BP's history is rife with incidents involving collusion, perjury, political interference, and other chicanery. As the price plummets further and further downward in a self-perpetuating cycle that only increases downward momentum, the company might soon cease to exist.
What does that mean for the Gulf coastline and the years of damaged economy and ecology?
Well first of all, any takeover/rescue deal of BP involving another major oil company is going to involve a negotiation with the U.S. government to cap the financial exposure and legal responsibility for the cleanup. The acquiring company will argue that the assets and earning power of the acquired BP assets must be unencumbered by any unknowns, such as where the limit might be on the actual cost of damages. They will further argue, at precisely the right moment, that the alternative is let the company go completely bankrupt, and stick the American taxpayer with the bill.
The Great Unknown
BP's scientific team responsible for evaluating and reporting the flow rate of oil escaping from the leak has been schizophrenic to date. It's gone from 5,000 barrels per day (bpd) at the onset of the disaster to somewhere between 50,000 and 85,000 bpd. (Though they now claim to be firm in their assessment of a rate of 60,000 bpd!) That's a tremendous amount of oil. The implications for such a huge and continuing disaster are as yet unknown, and there is surely a point in the forward-accounting math exercise on going at BP where two lines cross and financial insolvency results.
There will be many secret meetings among governments of the U.S., UK and BP executives. This is an unprecedented catastrophe. The future reverberations will penetrate distant markets, economies and ecosystems—and will potentially become an economic, and then political, time bomb.
If BP were to fail, its contribution to the decades of ecological relief efforts that will be required will suddenly cease, and the U.S. government will be forced to pony up year after year after year—and that won't be an easy situation to diminish in the eyes of voters. Obama, while doing all he possibly can and setting precedents of his own, will nonetheless be remembered as the president who stuck the American taxpayer with the clean-up bill when BP collapsed. His advisors are acutely aware of this, and BP's voluntary commitment to cancel dividend payments and put up US$20 billion are designed to assuage the anxiety of shareholders dumping BP stock like an Exxon Valdez.
It is important to consider, too, that maybe 60,000 bpd is yet wrong. Maybe it's more like 200,000 bpd. At a mile beneath the sea, how do they know? What was the production flow rate of the Discovery platform before the disaster? Was it choked or open?
Disinformation, whether inadvertent or intentional, has the same effect. The public is lulled into a complacency that soon morphs into apathy. Just as roadside bombs killing civilians and soldiers alike have become such a ubiquitous news item that the horror and tragedy are now lost in the message; we grow a resignation and finally indifference to the ongoing calamity. We can't help it. . .it's called news for a reason. Our collective attention span has a limit, and it is this limitation that thwarts us from genuinely responsible environmental stewardship.
BP and the U.S. government know and count on this. When BP came out with the misinformation that they thought their 'top kill' technique had been successful, shares in the stricken stock briefly rallied before news of its actual complete failure induced the resumption of hemorrhaging value.
Getting What You Pay for
BP's recent earnings proudly proclaimed a huge reduction in operating and replacement costs, as it boosted profits amid flat production growth. Stories are emerging by the dozen of a cost-cutting managerial mindset that, at the end of the day, will be deemed criminally negligent. Shareholders are bearing the brunt of this eventuality now, as opposed to later.
Because the shares of BP are half owned by Americans, this is a fitting outcome. Investment in corporations as massive and far-flung as BP comes with a certain exposure to financial liability that can only be mitigated by due diligence. If you look at the track record of BP's poor judgment and absence of integrity since the company's founding, you should be able to deduce that, while the company has been paying fat dividends for a long time, it has also demonstrated willingness to disregard the law and ethical conduct.
As evidence emerges suggesting shortcuts in the interest of cost reductions despite awareness of increased risk of mechanical failure, the potential for criminal charges grows. Obviously, the increase in financial exposure should this possibility become reality could be exponential. If you bought shares of BP thanks to its impressive history of dividends without performing such due diligence, you have nobody but yourself to blame.
$20 Billion Is a Drop in the Bucket
Although it seems like a lot of money, the $20 billion fund pledged by BP CEO Tony Hayward as result of Obama's demand will prove wholly insufficient in the big picture. But beyond that, both Hayward and Obama have stipulated unequivocally that this is no cap. That's a horribly dangerous precedent for Big Oil, whose legal and financial obligation was heretofore limited by the Oil Exploration Act of 1991's ceiling of $75 million for oil spills.
That law has been, effectively, erased as a result of the statements by Hayward and Obama, though the Act's existence will likely play big time into BP's defense of civil and criminal charges.
BP's Other Woes
Besides the as-yet unquantifiable exposure from civil, criminal, punitive and compensatory outcomes from the Discovery spill, there are other factors on the BP landscape that, while puny in comparison with the oil spill, still incrementally weaken the company's financial firepower. When a major foe like BP is suddenly wounded by this black swan event, wolves circle mercilessly waiting for an opportunity to go for the throat.
The Russian/BP natural gas joint venture (JV), TNK-BP Ltd., has been forced into bankruptcy by the Russian side, which seeks to kick BP out of the deal altogether. BP has no choice at this point but to bend over and take one for the team.
The lawsuits from the New York State pension fund have just been announced. The State of Florida pension funds, which have already pegged losses on investment in BP to $65 million, is certainly observing the situation with great interest; and 5 will get you 20 that they follow suit (pun intended). What about the thousands of other investors who hold (or held) billions of dollars worth of increasingly worthless BP scrip?
The End of BP
BP's earnings in 2009 were over US$6 billion, up from $2 billion the previous year. But very tellingly, there was no growth in production over the previous year. If BP has already committed to a $20 billion fund for this year, of which over $2 billion has already been consumed in immediate clean-up and containment costs, then what's to stop the company from continuing to hemorrhage cash even as the leak gushes at 60,000 bpd? Who can say with any credibility when the flow will be stopped? And certainly no one but no one can authoritatively predict the immense and possibly irreparable damage to ecosystems both local and far-flung from the site of the disaster. The collapse of BP might not be imminent, but its eventual demise is, in my opinion, without doubt.