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Will Gulf oil spill sink BP’s Whiting project?
News Articles | Post-Tribune | Gitte Laasby | June 13, 2010
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WHITING — It’s too early to tell whether the oil spill in the Gulf of Mexico will have any impact on the BP Whiting refinery and what that impact may be, stock analysts say.
A severe stock tumble has led to rumors that BP?will go bankrupt, be bought up, or cut down on investments like the Whiting $3.8 billion expansion. One New York stock analyst said BP’s survival is at stake, but that it?can survive if it limits dividends to shareholders and prioritizes which investment projects to move forward with.
A severe stock tumble has led to rumors that BP?will go bankrupt, be bought up, or cut down on investments like the Whiting $3.8 billion expansion. One New York stock analyst said BP’s survival is at stake, but that it?can survive if it limits dividends to shareholders and prioritizes which investment projects to move forward with.
“There’s rumors the company will be dismantled, be acquired by another rival. I think there’s a lot of rhetoric. I don’t think that will happen,” said Fadel Gheit, managing director for Oppenheimer & Co. in New York.
So far, BP has spent $1.43 billion on spill response, cleanup and relief wells, and it expects spending to continue at that rate for a while after the well is capped. Penalties and fines would be on top of that.
Gheit said shareholders are most likely to be hit because BP?will need much of the $1 billion it currently pays in dividends every month to pay for the cleanup. He said as long as BP?has money to pay for claims, it can continue to invest in places like Whiting.
“Some of the capital projects will be deferred or downsized, but spending is a priority, otherwise BP will cease to exist. Everybody wants BP to stay in business to continue to generate a profit so they can afford to pay a cleanup or restitution,” he said.
“Projects will not be suspended. Projects will be selectively deferred or scaled back. As long as they’re generating enough money to pay for the cleanup, pay for the spill, the company can do what they want. As long as they meet whatever claims are submitted to them, they can pay dividends, pay capital spending.”
BP Chairman Carl-Henric Svanberg said in a financial statement the company will continue to invest while paying dividends and paying off debt.
“It remains our aim as always to strike the right balance for shareholders between current returns through the dividend, sustained investment for long term growth and maintaining a prudent gearing (debt) level,” Svanberg said.
“Clearly they’re putting investment in long-term growth on par with dividend and debt levels,” said Cathy Milostan, an equity analyst with Morningstar in Chicago. But “with a global company like BP, I don’t know where Whiting ranks among the other projects.”
BP?spokesman Scott Dean said BP “remains committed to the Whiting modernization.”
“A lot of people’s jobs depend on it and we move on as planned,” Dean said.
The refinery employs roughly 1,500 workers and expected to have an additional 2,000 contractors working on the refinery expansion, due for completion in 2012. Between 60 and 80 more workers will be employed once the expansion is complete, Dean said.
Long-term impact unknown
Since the oil rig explosion on April 20, BP stock has lost more than 50 percent of its value. In seven weeks, stock slid from $60.48 per share to a 14-year low of $29.20 on Wednesday.
By comparison, Exxon stock traded at just over $11 a share before the Valdez crash on March 24, 1989. It bottomed out less than three weeks later at $10.44 — a dip of less than 7 percent. It was back to preaccident levels by the end of the year.
BP’s challenge is much larger, Gheit said.
“It will change the company forever,” he said. “It is the largest liability the company ever faced — that any company ever faced. It has caused BP to lose half of its market value in 40 days. It basically evaporated almost $100 billion of the company’s market value.”
For BP, long-term consequences are still unknown because the spill is not yet contained. That’s what makes BP stock so volatile right now, Milostan said. She said to be able to predict the consequences, investors and stock analysts are looking for three milestones: short-term for BP to stop the spill; mid-term to clean up what’s already been spilled; and long-term, to pay claims for damages.
She said BP currently spends $20 million to $40 million per day on cleanup.
“It’s anywhere from $3 billion to $5 billion or even greater than $5 billion that they’ll incur until the year’s end,” she estimated. “That’s merely the near-term costs spent to contain the oil, skim the oil and go through shoreline recovery efforts.”
BP?has enough money to cover near-term costs and could borrow money without exceeding the company’s debt targets, Milostan said.
“We know they just indicated they had $5 billion cash on the balance sheet. They have the capacity to borrow without surpassing their own self-imposed debt target. They had indicated a net debt ratio. They want to maintain a 20-30 percent net debt ratio. That’s the debt to amount of equity,” she explained. “They’re currently at 19 percent at end of the first quarter. So in theory, they could incur more debt and still be within that net ratio. They could borrow another $13 billion and still be within their own debt limits.”
Gheit estimates the accident could cost BP as much as $20 billion, but that punitive damages could triple that. So far, 37,000 people have filed claims against BP, he said.
BP?reportedly made $246 billion in revenue in 2009. It employs about 30,000 people in the United States.
BP acknowledged it’s taking a big financial hit as a result of the spill.
“The longer-term costs of environmental remediation, claims and litigation are not predictable at this stage, but they will be sizeable and are likely to be spread over many years,” the company said in a news release.
But BP CEO?Tony Hayward said BP is a strong company that has “weathered many storms before.”
BP said its cash inflow and outflow are balanced at an oil price of $60 per barrel.
“Under the current trading environment, we are generating significant additional cash flow. In addition, our gearing is currently below the bottom of our targeted range. Our asset base is strong and valuable, with more than 18 billion barrels of proved reserves and 63 billion barrels of resources as at the end of 2009,” the company said in a Thursday news release. “All of the above gives us significant capacity and flexibility in dealing with the cost of responding to the incident, the environmental remediation and the payment of legitimate claims.”
Tagged with: bp whiting, gulf spill, refinery modernization
