BP “Where’s the Cash?”
Let’s start with some disclosures: I am not an oil analyst, nor do I follow British Petroleum (NYSE:BP) all that closely and I do have a position in out of the money puts on BP common stock.
Now maybe my position as a generalist enables me to take an unbiased look at BP’s financials, and they look pretty grim. However, my lack of detailed understanding of the company means I could miss something, most importantly 1. A rise in oil prices could dramatically boost BP’s cash flows*, 2. Sales of “hidden assets” (i.e. assets which are valuable but contribute to current EBITDA or cash flows)
Summary and Conclusions:
1. Company cash flows is tight. For example, they borrowed to pay the 2009 dividend.
2. Post Spill analysis says company’s free cash flow is very low ($3b or about 30c/share)
a. This doesn’t support dividend resumptions any time soon
b. Low free cash flow could mean greater downside risk in the common stock
3. The CDS and bond markets seem to be much more worried about BP lack of free cash flow
a. The CDS market is pricing in a 30-50% chance of bankruptcy, where as the equity at $30-ish is NOT, in my opinion.
b. No wonder banks are asking for 10% coupons on new debt. Most likely they have done a much more detailed, through analysis yet have come to the same conclusions.
4. No wonder the Company is trying to raise $50b from new bank loans and asset sales. They need the CASH!
Selected BP Financials:
Up 4% y-y
Reserves 18.0 MMboe
Reserve Value Using $10/bbl reserve value
assume $40b npv Spill costs
NAV is about $40/share
Finding Costs $4/bbl
Lifting Costs $7/bbl
Memo: March Balance Sheet
Net Debt $16.6b
POST SPILL ASSUMPTIONS:
Oil Price $70/bbl
CAPEX (net) $15B cut from current $19B
Dividends no divi’s paid
Cash Taxes ($7B)
Cash Interest ($2B)
Cash Acquisitions --- no more acquisitions
Spill Costs ($8B) $2b/quarter no cap
TRUE FREE CASH FLOW = +$3B
EBITDA - CAPEX - Taxes – Interest – Acquisitions - Spill Costs = +$3B
*A $10 Change in the Oil Price Assumption could contribute about $10b in free cash flow
David E. Beard, CFA – Founder & CIO – Winterport Capital – dbeard@winterportcapital
Disclosure: Long BP Puts