In the real world, hurricane season has begun, which could make plugging the
leaking oil well in the Gulf of Mexico tougher. Financially, a renewed
sell-off last week pushed BP’s share price to a 14-year low. It has more
than halved since April 20, leaving the company worth about $85bn.
The latest trigger for concern is liquidity: does BP have enough cash to cover
a sudden credit event? It really should not be an issue; BP has about $20bn
in cash and credit lines. It has suspended dividends until at least the end
of this year, is cutting capital expenditure by 10 per cent and will sell
$10bn of assets.
Drop in the ocean
But investors are fretting all the same as they grasp for a handle on the
total cost of the incident. BP says expenditure on the response so far is
$2.35bn, at this stage a drop in the ocean.
As for future costs, the market is evidently pricing in significant punitive
damages and fines, on top of the clean-up costs. Then there is reputational
damage. Extrapolating from the discount between BP and its peers that
emerged after safety incidents in 2005 and 2006, Nomura estimates this could
account for up to $25bn of market value.
Investors may be waiting for the oil to stop flowing and a final assessment of
the damage. But in the gap of about $30bn between those cost estimates, the
$20bn in the escrow fund and the amount by which BP’s value has been written
down, most unpleasant scenarios have been amply priced-in. For those
prepared to brave the risks, substantial value may be revealed when the
storm clouds finally pass.
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