British Petroleum
Jun 17, 2010
Posted by Jody Eisenman | Filed under Uncategorized
BP is the largest company in the United Kingdom. It has been around for over a century, when they began as the Anglo-Persian Oil Company. Since then, they have merged with Amoco and Atlantic Richfield, also known as ARCO. BP has been steadily profitable, with revenues in excess of $250BB, and earnings of about $20BB. Helped by a huge dividend, their stock had risen from the mid-30s at the depth of the market decline in March of last year to over 60 in April of this year. Then came April 20.
On that day, an explosion on a oil rig led to 11 deaths and a massive oil spill in the Gulf of Mexico. Since that date, estimates of the amount of oil released and the potential clean up costs have increased constantly. As such, BP stock lost about half of their value. The devastation has effected the shipping industry and negatively effected a huge portion of the US marine environment. In a bid to show leadership, you even had President Obama involved in castigating the company on national television.
Today, BP finally announced that they were setting up a $20BB fund. This may not be enough. In addition, they suspended their dividend, which will save them another $10BB. The question is, what’s next? I can see three possible scenarios:
1. BP finally gets a handle on the problem and takes steps to resolve it. The stock will probably increase under this scenario, depending on the eventual cost.
2. BP gets taken over by one of its’ competitors. There are rumors of Exxon and Shell being interested, but these are only rumors. A takeover could mean a $50+ stock price.
3. The costs and political pressure become so great that BP decides to seek protection under the bankruptcy code. This would have the biggest negative effect on the stock price.
Although the situation is still ongoing, I think scenario 1 is most likely. Bankruptcy is a final resort, and even Obama would not like to see this, as it will limit BO’s ability to pay claims. As far as scenario 2, a takeover is always tough to predict. Even if someone was interested, it would be an incredibly complex deal subject to heavy regulatory approval. Therefore, I believe BP will finally get a handle on the costs. However, this situation is still changing every day, and as such, anything could happen.
