Speculators Bet On BP (BP) Bankruptcy; Liabilities Could Reach $400 Billion

June 9, 2010 4:45 PM EDT
The market is reacting today to fears sparked by energy banker Matthew Simmons of Simmons & Co International that BP (NYSE: BP) will be bankrupt by the end of the summer.

Shares of BP closed down 16% today to $29.07 and are down 51% since the spill started on April 20th.

While these bold comments make for good media headlines, investors need to evaluate the likelihood of such an event happening based on the limited amount of solid data that is out there.

To evaluate a potential bankruptcy investors need to gauge BP's (NYSE: BP) liability from the spill.

Based on analysis by Goldman Sachs, using the Exxon Mobill (NYSE: XOM) Valdez spill in today's dollars, they estimate that it will cost BP $40,000 per barrel for the containment, clean-up, litigation and related cost of the spill.

So how much is spilling from the well? The best estimates suggests it is 20,000 barrels per day. The spill has been ongoing for 50 days. This gets you to around 1 million barrels spilled so far, minus the 60,000 barrels that BP has collected in the past few days from the containment cap - so 940,000 barrels in the Gulf. Based on this, BP's liability is $37.6 billion so far.

If the spill is just 15,000 barrels per day - which would appear to be the minimum since it is what the containment cap is collecting daily - then the liability drops to $27.6 billion so far.

It has been reported that BP said a worst case scenario for the spill is 60,000 barrels per day. If this was the case then you would have 2.94 million barrels in the ocean. This would bring BP's liability up to $117.6 billion.

Someone today said that the spill could be 100,000-200,000 barrels per day. If this was the case then you would have $198-$398 billion in liability.

So you have potential liabilities for BP ranging from $27.6 billion to $398 billion, quite a range.

Of course, laws could cap the liability BP faces. But with Congress already seeking to re-write the laws, this would seem like a long shot.

Before the spill, BP had assets of $241 billion and liabilities of $136 billion, or net assets of $105 billion. The company has cash flow before capex and dividends of between $25-$40 billion per year.

If the company ended all dividends and stopped spending on capex, it is conceivable that BP could handle even the worst case scenario. But it is also conceivable that if the spill is at the high end of these ranges, a bankruptcy could ultimately limit liability and may be a may be a sound financial strategy. What would happen to equity holders in such a scenario is unknown.

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