Friday, June 4, 2010

$BP #BP’s Cost, Like the Oil, Isnt Contained

9898 By Steven D. Jones
   A DOW JONES NEWSWIRES COLUMN
  BP Plc. (BP) says it has the financial wherewithal to shoulder the cost of cleaning up its oil leak in the Gulf of
Mexico. Investors, whose moods have darkened along with the Louisiana coastline, shouldn't be as sure.
  Since BP's well ruptured 46 days ago, the cost of containing and cleaning the oil has risen to $24 million a day,
according to credit rating agency Fitch, which downgraded BP debt this week.
  In an analyst call Friday, BP said it had more than enough money to handle its obligations. The company generated $72
million after dividends in free cash flow daily during the first quarter of this year.
  BP's statements are unlikely to mollify shareholders, who have chopped $50 billion from the company's market
capitalization since the leak began. They're worried BP's efforts to stanch the leak (a containment device was placed
over the broken wellhead on Thursday) could continue rising into the summer.
  BP shares were down 5.4% at $37.16 Friday afternoon. They have plunged 37% since the accident.
  Investors' concerns are well placed.
  The London-based oil giant generated $7.7 billion in cash in the first quarter, but it may not be able to sustain that
rate if profits drop because of fallout from the leak. James Largay, an accounting professor at Lehigh University, says
BP's operating income margin of just over 10% is "not the kind of margin that can cope with the shocks that BP is
facing."
  Other factors could also weigh on the stock.
  Lawmakers have called on BP to suspend its dividend, a move that would weigh on the stock. Lawmakers say they want to
see both penance and a reserve big enough to handle the cleanup.
  On the analysts' call, BP said it has enough money to meet its responsibilities, though it declined to put a cost on
the effort, and enough to maintain its 14-cent-a-share quarterly dividend.
  Of course, BP has sources of money to offset the cost. Last year, it boosted daily oil production 5% to nearly 4
million barrels. Its refining margins rose in May. Its marketing operation, which spans 80 countries, lessens the retail
risk it faces in the U.S.
  BP is also unlikely to bear the entire cost of the cleanup. It owns 65% of the leaking well; its partners will have to
pitch in more than a third of the total cost, whatever that comes to.
  Still, BP faces a host of unknowns. If the well gushes into August, as some fear, BP could be forced to pay
reparations to 15,000 Gulf coast shrimpers. The cost could swiftly reach $70 million a day, virtually all BP's free
cash.
  And there are follow-on costs. David Stedman, an oil analyst at Daiwa Capital in London, suggests the spill could add
80 cents a barrel to BP's exploration and production cost in the Gulf. Multiply that by its amount of production there
and it could add as much as $1 million to its daily operating cost.
  News footage of blackened shore birds and fouled beaches reflects the murky outlook for BP's finances. Despite
management's assurance, investors need to remember the cost, like the oil, isn't contained.
  (Steven D. Jones is an In The Money columnist who takes a sophisticated look at the value of companies and their
securities and explore unique trading strategies. He can be reached at 360-834-1865 or by email at
steve-d.jones@dowjones.com.)
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