Also, I think people vastly underestimate the financial might of BP.\u00a0 Its profits in 2009, a very bad year for the oil companies, were $13.96bn<\/a> and in 2008 – a very good year – were $25.59bn.\u00a0 So we can say a typical year’s profit is about $20bn.\u00a0 The cleanup and other costs of this disaster are estimated to be between $10bn-$30bn.\u00a0 BP has said it will pay all legitimate costs, and I am certain that it will make good on this promise, but you can bet your life they will have a team of crack lawyers ensuring that only compensation for those things directly caused by the spill will be paid, and all others fought tooth and nail in the courts.\u00a0 For example, via The Hayride<\/a> I came across this article<\/a>:<\/p>\n VENICE (Louisiana) \u2013 LOUISIANA\u2019S charter fishermen are slamming US media coverage of the Gulf oil spill for doing more damage to the tourism industry than the slick itself, with livelihoods at risk.<\/p>\n \u2018Before the spill, I had three days open this month. Now I got all kinds of days open,\u2019 charter boat captain Chris Wilson told AFP, as he cut up a dozen-strong bounty of speckled trout, channel bass and even yellowfin tuna he caught with clients.<\/p>\n Venice Marina, proudly proclaiming itself \u2018The Fishing Capital of the World\u2019 is all deserted but for Mr Wilson \u2013 the only fisherman preparing a catch \u2013 and some bored restaurant staff standing around the empty wharf-side bar.<\/p>\n But Mr Wilson\u2019s friend and Venice Marina\u2019s former owner Dave Ballay does not blame the mammoth and growing oil slick in the nearby Gulf of Mexico. Instead, people here blame the media, which day after night for over two weeks has detailed the doom and gloom facing the coast and its beleaguered residents.<\/p>\n \u2018Ninety-five per cent of the state of Louisiana\u2019s waters are still fishable,\u2019 Mr Ballay said with a bemused but angered tone.<\/p><\/blockquote>\n And as the guys at The Hayride said themselves:<\/p>\n [I]f these guys think that, even though BP has said it will pay all \u201clegitimate\u201d claims arising out of this disaster, the company is going to cough up for losses which have come out of the agenda-driven media\u2019s overblowing the spill without a fight, they have another thing coming. A perfectly-clean Florida beach which can\u2019t draw tourists because Charlie Crist declared a state of emergency and swore off offshore drilling ever again, creating the impression of pollution where there probably won\u2019t be any, isn\u2019t going to have a \u201clegitimate claim\u201d against BP. They might have one against Fox News or CNN or Charlie Crist, but not BP. And BP will fight that claim, as they should.<\/p><\/blockquote>\n Quite.\u00a0 Also, you can also bet your life that BP will be expecting Transocean and Halliburton to be coughing up for a portion of the costs if it transpires that they were at fault at any point before or during the spill.\u00a0 The Halliburton cement casing seems to be coming under scrutiny at the moment, and I expect the significance of this will become apparent sooner or later as no doubt will other factors.\u00a0 The legal wranglings over who was to blame for this are likely to drag out for months if not years, and the compensation claims will be challenged and fought over even longer periods.<\/p>\n So let’s assume that the total claimed costs of the spill are $30bn of which $10bn BP manages to hive off onto somebody else or get chucked out of court, leaving them with a bill of $20bn.\u00a0 As we’ve just seen this equates to an average year’s profits, but will be paid out not at once but over the next decade with about half in the next 2-3 years, say.\u00a0 So from 2010-2013 BP will be paying about $3.3bn per year (16.5% of annual profit) followed by $1.4bn (7% of annual profit) from 2014-2020.\u00a0 This is not good for investors, but it’s not enough to bankrupt the company.<\/p>\n According to their annual report<\/a> for 2009, BP were sitting on an $8.3bn pile of cash.\u00a0 They have spent $1.25bn<\/a> on the cleanup so far, some of which has already been spent on addressing claims and cleanup costs which will form part of the $20bn total cost.\u00a0 Assuming they’ve been spending on full flow for 6 weeks now, they can afford to keep going like this for another 10 months using the cash they have lying about in their sock drawer.\u00a0 Even supposing they did run out of cash, BP could easily borrow more, issue bonds, or sell an asset or two.\u00a0 In other words, the immediate costs of the spill are not going to bankrupt BP either.<\/p>\n So the next issue to consider is the drop in BP share price, which has been significant<\/a>, especially once attempts to top-kill the well failed (incidentally, those of us watching the live video feed knew this had failed a couple of days before the media and the markets.\u00a0 If I’d known how, and if what people say about those with “inside” information is true, I could have made a killing.\u00a0 Maybe.).\u00a0 The company has lost 38% of its value since the spill, but its market capitalisation is still $120bn.\u00a0 It is a wounded giant, and it is haemorrhaging fast, but it is still a formidable beast.<\/p>\n But it is interesting to look at what is happening with the share price.\u00a0 I have captured the graph as it stands today (click the graph for a bigger version):<\/p>\n Share prices often reflect uncertainty rather than the scale of what is actually happening.\u00a0 Up until the top kill attempt failed, everyone was hoping BP could stop the flow of oil and limit the amount of oil needed to clean up.\u00a0 Until they failed to do so, nobody knew what the final costs might be.\u00a0 Nobody wanted to offload their shares and find the well had been capped and the cleanup costs were now looking like only $10bn.\u00a0 So when BP announced the top kill had failed and effectively they would not be able to stop the flow until the relief well was drilled, the share price took a steep drop on 27th May to account for that but a degree of uncertainty was removed: everybody now knows there is another few weeks of 12,000-19,000 barrels per day going into the sea (BP’s efforts to collect some of that notwithstanding) and the initial worst case cost estimates of $20bn-$30bn are now looking likely.\u00a0 So the share price dropped steeply, but has since stabilised: people now have a better idea of what the true costs will be.\u00a0 Unless there is some other serious setback, such as both relief wells managing to snap their drill strings downhole or any other reason preventing their completion, the share price should not fall much lower.\u00a0 There might be some daft political factor which causes it to drop further – some knee-jerk legislation ordering BP out of the US, or something – but what we know now is enough to stabilise the share price.\u00a0 And if it does drop much lower out of general fear by risk-averse investors, you can be sure there are a few people who will think the stock is undervalued and will be snapping it up (which seemed to be happening before the top kill attempt failed, probably by people gambling on its working).<\/p>\n So, assuming its current value of $120bn holds steady for a while, is this low enough to attract a take-over bid?\u00a0 I don’t think so.\u00a0 Firstly, nobody is going to go near the company until the well is capped, and once the well is capped the share price should rise a little: another area of uncertainty is removed.\u00a0 Secondly, Tony Hayward is probably a bit busy at the moment and wouldn’t be able to spend much time talking about a take-over and his discussing the finer details of his severance package might just attract some criticism at this time.\u00a0 By the time the company is in a position to negotiate a take-over bid, the worst of the Macondo disaster will be behind them and the company will be in a stronger position.<\/p>\n But most importantly, who would be in a position to buy them?\u00a0 There is a short article<\/a> on the FT blogs discussing this which contains this useful little graphic:<\/p>\n As the FT’s Kate MacKenzie says:<\/p>\n While it might be a technically viable, and attractive, target for some companies, there are enough drawbacks to make it difficult to see who might be seriously interested.<\/p><\/blockquote>\n Indeed, and I’d agree with the pros and cons identified in the graphic.<\/p>\n With one exception: PetroChina.\u00a0 Whilst it might seem obvious that buying a company allows you to acquire expertise and technology, it is usually not so simple.\u00a0 For what does the expertise actually consist of?\u00a0 People.\u00a0 The Macondo accident notwithstanding, BPs expertise in deepwater drilling lies in its employees.\u00a0 They know how the technology was developed and how it is operated and the philosophies behind their employment and operation.\u00a0 Most of this information is stored in half a million procedures and manuals on the shelves of the BP offices, but it is the people who know how and when to apply them.\u00a0 The manuals tell you what to do, it is the people who know how to do it.\u00a0 Good implementation is as important as the asset itself.\u00a0 So if you want BP’s expertise, and you want to make use of their technology, you need to ensure you are buying their people.<\/p>\n And how many BP staff want to work for a Chinese company?\u00a0 Not too many, I’ll bet.\u00a0 In the event of a PetroChina takeover of BP, most staff would want to head for the exit door.\u00a0 True, most of them would have no choice but to stay because the industry does not have enough vacant places for a staff the size of BP’s to move elsewhere (and especially not right now).\u00a0 But the experts who PetroChina would be hoping to acquire?\u00a0 They’d likely be off like a shot.\u00a0 The chap who has spent 20 years in the development of deepwater directional drilling, his mate who has 15 years under his belt on seismic mapping of reservoirs, and the brilliant young process engineer who performed so well on the last LNG project?\u00a0 They’ll be banging on the doors of Exxon and Chevron within twenty minutes of the Chinese taking the keys.<\/p>\n There’s some anecdotal evidence to back this up.\u00a0 When Gazprom took over the ownership of Sakhalin Energy from Shell in the summer of 2007, both the expatriate staff and the Russians thought it was going to get worse for them, and it did.\u00a0 It took a year or so to get going, but there was a campaign to squeeze the terms and conditions, especially things like travel and medical, which became a bloodbath when the oil price crash came and Gazprom could not afford the operating costs of the company.\u00a0 Those who were not fired found their benefits axed, contracts renewed for only a few months each time, salaries effectively cut as the rouble fell, training courses cancelled, overtime forbidden and working practices take a step away from what was the norm under the Shell management systems, changes which were not for the better in any other area but finance.\u00a0 Almost as soon as this started there was an exodus of those who could get a job elsewhere (which in the climate was not an easy task), and interestingly it was the Russians who were the most unhappy.\u00a0 They had purposefully applied to a foreign company because they didn’t want to work under Russian management, and their fears were realised once Gazprom started flexing its muscles.\u00a0 At the time most had no choice to stay, but as the global oil and gas industry slowly picks up, its best employees are now leaving for elsewhere if they haven’t gone already.<\/p>\n Of course, there is no guarantee that PetroChina would start to squeeze the employee terms and conditions currently enjoyed by BP staff in the event of a take-over, but it is likely.\u00a0 They would also want to start bringing their own management into play, which would cause enormous problems and employee tensions due to cultural differences if nothing else.\u00a0 The biggest job PetroChina would have on their hands were they to take over BP would be to retain their best staff, but supposing they couldn’t?\u00a0 Does it really matter?\u00a0 Well, yes it does.\u00a0 The US government is going to be very nervous about allowing any oil companies to be drilling in deep water after the Macondo disaster, and the beefed-up regulators are going to be breathing down their necks with every turn of the drill bit.\u00a0 Even if we disregard the political objections to PetroChina buying BP and operating in US waters, it is highly unlikely they will be able to negotiate a permit having bought somebody else’s license and assets and watching the expertise who made it all happen walk out the door to be replaced by people who have no deepwater drilling experience whatsoever.\u00a0 And you could extend these concerns with deepwater drilling in US waters to other areas of the global industry, such as the operation of refineries and LNG terminals.<\/p>\n So my prediction is BP will not go bankrupt sooner or later, and will not be subject to a take-over.\u00a0 Their reputation in the US will probably be ruined for good so you might find them selling off their American operations, but as a company they will survive, be battered and bruised for a few years, but be as strong as they ever were when the next disaster hits – hopefully for them – somebody else.<\/p>\n","protected":false},"excerpt":{"rendered":" There is a lot of speculation around over what will happen to BP once the dust – or rather the oil – settles after this Macondo spill.\u00a0 Here’s my prediction: nothing. A browse of any website discussing the subject will … Continue reading ![\"\"](\"https:\/\/www.desertsun.co.uk\/blog\/images\/BP_share_price.jpg\" "\\"BP")
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