Will BP Go Bust?

Jun. 1.10 | About: BP p.l.c. (BP)

By Adam Sharp

Three weeks ago I wrote an article titled, "Hold Your Nose and Buy BP Stock." That made writing this piece a bit... awkward.

But I'm not one to shy away from mistakes. It was a bad call.

That said, I sold my BP (NYSE:BP) shares for an 8% loss a few days later (and posted a comment to notify readers). That was around the time when it became apparent that BP and reality were out of touch.

Officials from BP were still saying the leak was only gushing 5,000 barrels of oil per day. But good ol' fashioned journalism by Richard Harris and others at NPR said otherwise... They went out and interviewed scientists who are experts in the science of flow-rate analysis to get estimates on how much oil is really leaking out. (Curious that BP or the EPA hadn't thought of this... )

When those estimates indicated 5 to 20 times higher levels than BP was estimating, I got worried and sold. It helped me avoid a bigger loss on my BP shares, but the broader implications are what really disturbed me.

Now that we know the top-kill effort appear to have failed, I am seriously starting to think that BP may not survive this event. And I'm not being hyperbolic here; if I had to hazard a guess, I'd say there's at least a 40% chance BP will not find their way through this mess.

When I had the bright idea to buy BP, it really did look like a bargain. It was a $170b company that lost 20% of its market cap (around $30b) due to a disaster that might result in up to a one-time charge of $6b(?!)... $6b is chump-change to a company with an average daily profit of $43 million (in 2009).

The dividend yield on BP was also tempting (another reminder where the term "dividend trap" comes from). But that was before we knew just how bad the disaster would become... and how poorly efforts to plug the leak would go.

Compared to Valdez

The Valdez grounding dumped 11 million gallons of crude into the ocean. Using the most conservative estimates, the Gulf disaster has already released 18 million gallons, and that number may be much higher — 100 million gallons or more.

The Gulf Coast is also a much more important (environmentally and economically) area than Prince William Sound, where the Valdez went aground.

In inflation-adjusted terms, Exxon's (NYSE:XOM) Valdez disaster cost around $7b all told. This is going to be much, much bigger than that.

Nobody knows exactly how much the spill will end up costing BP. Early estimates ranged from $500m to $3b. Those estimates have been steadily rising.

I'd be shocked if the total bill came in at less than $50b; $50b is the low end of my range, which goes up to around $200b.

Could BP raise $200b if they needed to? Maybe, but I doubt it... Such a huge capital raise would be unprecedented, as far as I know.

One of the other majors may step in at some point and buy BP, but that would be taking a huge risk (and may not even pass scrutiny over monopoly concerns).

At Least Two More Months of Oil Gushing into the Gulf

With the top kill effort having failed, experts say we're looking at at least two more months of oil gushing into the Gulf of Mexico. That's how long it is estimated that the relief well will take to complete.

And we don't know for sure that the relief well will work. It's a mess.

The more I learn about this debacle and BP's disastrous management of it, the less confidence I have in their survival. Their safety and environmental record is simply atrocious, as shown by this shocking report by the Center for Public Integrity.

I honestly don't see how BP can survive in its current form. Maybe they can, but I'm starting to think they're destined for a date with bankruptcy...

Shares disclosure: No position.