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Vol. 15, No. 30 Week of July 25, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

BP off death watch; future open question

Chris Kahn & Jane Wardell

Associated Press Business Writers

The future of BP PLC has shifted in recent days from a death-watch discussion to a debate about how valuable the British oil giant will be after it finishes paying for the worst offshore oil spill in U.S. history.

BP gained temporary control of its broken well in the Gulf of Mexico on July 15 and is counting on shutting it off permanently within weeks. Its shares have regained more than a quarter of the value lost in the wake of the April 20 explosion on the Deepwater Horizon drilling rig. Talk of a possible bankruptcy or takeover of the company has mostly faded.

But the company still faces the daunting task of paying huge government fines and royalty payments, cleanup costs, damage claims and legal expenses for years. Analysts estimate BP’s final tab for the Gulf oil spill will be anywhere from $50 billion to $100 billion.

Many analysts feel BP can cover the costs if they’re spread out over years or even decades. But others don’t like the uncertainty. They note that the asset sales needed to offset at least part of those costs will likely make it a smaller company with reduced cash flow.

“We still don’t have any way of gauging” how much BP could eventually spend on the spill, Macquarie Research analyst Jason Gammel said. “We’re certainly not buying the stock.”

Others are more encouraged. “People are relatively optimistic about the situation for the first time since this started,” said Dougie Youngson, an analyst with Arbuthnot Securities in London.

BP shares traded in the U.S. were worth $60.48 on April 20, hours before the explosion of the drilling rig triggered the oil spill. They then spiraled downward to as low as $26.75 during trading on June 28. That slide wiped out $105 billion in market capitalization.

The stock began to rebound in July as details emerged about the possible sale of $10 billion or more in assets to help cover BP’s liabilities. The temporary capping of the well helped send the stock 9 percent higher in mid-July to $37.10.

Possible costs, liabilities

BP promised the Obama administration it will set aside $20 billion over four years to pay spill-related claims along the Gulf and has spent $3.5 billion so far. But beyond that, BP says “it is too early to quantify other potential costs and liabilities associated with the incident.”

Those include:

• Possible civil fines of up to $1,000 for every barrel of oil spilled. With the government’s estimate of the spill ranging from 2.15 million to 4.3 million barrels, the fine could be from $2.15 billion to $4.3 billion.

• The government also wants BP to pay royalties at a rate of 18.75 percent on the oil it collected from the well. BP put that figure at 826,800 barrels. However, the company could also owe royalties on the oil spilled into the Gulf if investigators determine that the spill was the result of BP’s negligence.

• BP has vowed to stay in the Gulf until the oil is cleaned up, which will take years. It’s hired thousands of people to clean beaches and marshes and skim oil off the water. It also has to pay cleanup costs incurred by the government.

• Anadarko Petroleum Corp. and MOEX LLC, BP’s partners in the blown-out well, are contractually obligated to pay 25 percent and 10 percent of the costs, respectively. But they have refused to pay BP’s initial bills totaling $388 million because they claim BP was negligent in its management of the well.

• The biggest wild card is legal liabilities. Lawsuits have been filed on behalf of workers who died or were injured in the blast, as well as local businessmen, shareholders and employees.

Capital spending cut

Analysts estimate BP’s operations will generate about $30 billion in cash this year if oil prices hold steady. BP recently cut back capital spending to around $18 billion, so that leaves about $12 billion in free cash. Normally, dividends totaling $10.6 billion would come out of that, but BP suspended dividend payments in June.

BP also has another $5 billion in cash, plus a $15 billion credit line. Adding in potential asset sales, that means BP will have as much as $30 billion available for paying penalties and other liabilities.

The company’s debt level stood at about $32.15 billion at March 31. It has talked to banks about borrowing more money if needed.

Even if BP sells some assets, it’s likely to remain one of the largest non-government-owned oil companies in the world. Just how big? The high-end estimate of around 4 million barrels spilled in the Gulf amounts to no more than one day’s output from BP’s vast global operations.

If BP can continue to get between $70 and $75 a barrel for the oil it produces, analysts believe its cash flow will remain sufficient to cover its Gulf liabilities. That doesn’t mean people pressing claims against BP have to root for higher prices, but the reality is that a sharp drop in oil could put them at risk.

West Texas Intermediate crude, the light oil that is the benchmark for global prices, is trading at around $76 a barrel. Brent crude, which is found in the North Sea among other areas, is priced around $75.40.

The company’s financial condition will become clearer when BP reports results for the second quarter on July 27. There’s a chance it will announce the sale of assets at that time.

Alaska, Argentina asset sales possible

Published reports have suggested the company is talking with Apache Corp. about selling a stake in the Prudhoe Bay oil field in Alaska, but BP has declined to disclose specifics.

Youngson, the Arbuthnot analyst, said a sale to Apache would fit with BP’s plan to sell assets that don’t affect the company’s long-term growth, a strategy it had before the Gulf spill. It also would make sense politically, he added.

Another candidate for a sale is BP’s 60 percent stake in Argentine Pan American, an Argentine oil and gas producer that also has operations in Bolivia and Chile. Analysts estimate the stake is worth about $9 billion.

Oppenheimer & Co. analyst Fadel Gheit said BP doesn’t need to sell assets now, but the company is digging in for years of damage claims. “Eventually they know they’re going to have to sell something,” he said. “It’s not if, but when.”

—Wardell reported from London. AP Reporter Jennifer Quinn contributed to this report.

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