The Local Paper

BP; A Brand Stained Beyond Redemption

A furor has developed over the possibility that BP will pay its usual $2.26 billion in quarterly dividends, thereby depleting its cash supply that might otherwise be used to pay compensation to oil spill victims and fines to the affected states and federal government.

As of March 31, 2010 (the last day for which reporting is available), BP (rated Aa2/AA-) showed $12.2 billion in cash, equivalents and short-term investment securities (typically those that can be quickly converted to cash with little principal risk).  In addition, there were  about $32 billion in trade receivables from product sold to its customers (typically collected within 90 days; often shorter than that) and another $23 billion in inventories. Marking that inventory to market today with the price of oil 11% below its 3/31/10 level leaves that inventory still worth over $20 billion.  Given the state of the industry, I think it’s fair to say that someone would be willing to buy that inventory at pretty close to market prices if BP were to make it available.  So my math says that’s $64 billion in liquid assets. They could do a receivables securitization and sell off some of its inventory and raise an oil tanker full of cash–and that’s without  selling off any drilling rights or other long-term assets of the company.  Add to that the company’s cash flow from operations which has been about $8 billion per quarter after capital expenditures (and for argument’s sake, I’m assuming that all the capex is required and not discretionary), so that’s another $32 billion per year.  Now we’re up to $100 billion in cash, cash flow and liquid assets.  By the estimates I’ve heard and read about possible fines and compensation, that number should suffice.

By this measure, worrying about the payment of a $2.26bn dividend in the next quarter seems misplaced.  This is a giant company.

The talk of Wall Street is the possibility (being raised to a probability with each passing day) that BP will take some action to avoid liability through use of the Texaco strategy of filing bankruptcy. This is what I think is going to happen at some point down the road. This is a far bigger risk to its claimants than anything else. And there’s nothing anybody can do about that either.  If you thought the questions around how the U.S. government treated creditors in the General Motors and Chrysler bankruptcies were troubling, just wait for this.  The temptation for the government to step in and do something extraordinary to prevent BP from using the established legal system from circumventing its financial responsibility will be huge.