Shares of BP plc (NYSE: BP) fell more than 15% yesterday on fears that one or more of several pieces of bad news would push the company even lower. There is the worry that the company will not pay a dividend to shareholders, a non-trivial concern seeing how BP paid out $10.5 billion last year. Then there were the rumors that BP might file for bankruptcy protection. Then the company’s bond insurance rates spiked, even as the bond prices themselves fell. To top it off, BP PUT contract options were selling briskly at strike prices of $15 and lower.
BP is getting some of that 15% back today, up around 12% on 3x normal daily volume so far. Other stocks that have felt the impact of the Gulf oil disaster are also regaining some ground today. Anadarko Petroleum Corp. (NYSE: APC) is up nearly 11% on 2x average daily volume, Transocean Ltd. (NYSE: RIG) is up nearly 6%, Halliburton Co. (NYSE: HAL) is up nearly 7%, Cameron International Corp. (NYSE: CAM) is up more than 5% and Nalco Holding Co. (NYSE: NLC) is up nearly 5%. MOP International (OTC: MOPN.PK) is up nearly 23% on its announcement that BP is buying containment boom from the small company.
On April 23rd, BP shares closed at $59.88, some 46% higher than the shares are trading today. The longer the leaking well in the Gulf continues to spew, BP’s clean-up liability grows. And the damages incurred by Gulf coast residents also continue to grow. It’s that uncertainty coupled with the fundamental soundness of BP’s assets that generates all the volatility and guesswork.
At the end of 2009, BP listed total assets of $236 billion, including $108 billion in property, plant and equipment. Some worry that BP will need to shed some of these assets in order to pay the bills due to the leaking well.
The company’s operating cash flow in 2009 totaled nearly $28 billion. A Wall Street bond firm has estimated that the total damages for the disaster would have to reach $58 billion before posing a solvency threat to BP. And Goldman Sachs has estimated that BP’s liability for the spill could be as much as $33 billion after taxes.
While it’s not inconceivable that the costs will top $58 billion, the odds are against it. Now it is conceivable that BP would file for bankruptcy protection, but the likelihood of such a move is remote, again unless BP’s liability goes to much more than $58 billion.
On the dividend issue, investors who squawk about giving up $10 billion in order to save a company with more than $200 billion in assets really ought to look for a new line of work. The hydrocarbons that BP has in the ground are only going to get more valuable, and new regulations won’t stop the company from extracting the oil and gas.
Maybe this is the sort of thing BP had in mind when it issued a press release this morning saying that it “is not aware of any reason which justifies [the falling] share price movement.” Now that’s disingenuous, and is consistent with BP’s PR approach to the Gulf spill from the beginning.
The company low-balled the size of the leak from the beginning and now admits that it is recovering more than 15,000 barrels a day, which is not even all the oil that’s flowing from the well. BP and the U.S. Coast Guard have claimed consistently that the leak was flowing at 5,000 b/d. Given the recovery rate, a new leak estimate is now being prepared by the NOAA’s Flow Rate Technical Group.
To be fair to BP, the company has probably resisted being more transparent about the disaster and what the company is doing for two reasons. First, it doesn’t want to panic shareholders any more than necessary. Second, the company really doesn’t know what’s happening 5,000 feet below the surface, is learning as it goes, and doesn’t want to admit it for fear of looking inept and for fear of causing the stock price to fall even further.
Those are legitimate concerns, but demonstrate a sort of tone-deafness on BP’s part to the magnitude of the disaster and the impact that it is having on U.S. citizens, particularly along the Gulf coast. The company wants the public to believe that it is competent, in control and doing everything it can to plug the well. By withholding information BP has succeeded only in giving the public reason to believe that it is lying, that it doesn’t know what it’s doing and that it is doing less than it should be doing to plug the leak.
