Tuesday, June 15. 2010
Posted by Karl Denninger in Oil The World at 18:18
SourceThe Market Ticker
"Ehhhh... BP A Zero?
"Probably not, but that's not the problem.
Let's run the numbers. The Government just said that the amount beingejected from the well is somewhere between 35,000 and 60,000 bbls per day.
Now let's look at the numbers, and analyze this strictly on that basis.
The minimum fine is $1,000/bbl spilled. But if negligence can be shown,the fine can be as high as $4,300/bbl.
This is strictly for the fine for spilling the oil,and excludes other considerations (damages, cleanup costs, potential criminalliability and of course whatever civil liability juries come at them with forall sorts of litigation.)
At $4,300/bbl we're looking at a fine of $150 - $258 million per day, andafter today's hearings it is probably reasonable to assume that BP will gettagged for "negligence" (at best.)
We're 50-some days into this; that works out to somewhere between $7.5 and$13 billion in fines alone thus far. If we presumethey can shut the well down in the middle of August, we're looking at another 50days (roughly) before that happens, leaving the totalfines in the neighborhood of $15-25 billion.
The company, like most multi-nationals, is partitioned. That is, BP is aconglomerate with legal and financial firewalls (physical ones) betweensubsidiaries.
The total value of their US-based assets is estimated somewhere around $90billion. On a 12-month trailing basis they have produced $265 billion inrevenue with an EBIDTA of $38.8 billion and a net income attributed to commonshares of $20 billion - globally.
Taken that way, and expecting complex litigation around any fine and otherlitigation, the payout time would be expressed in years, not months. As suchat first blush the fines and other exposure doesn'tlook like it will be enough - even under an adverse scenario - to zero thecompany.
BUT - will BP let things go that far and contaminatetheir global earnings with this claim?
More to the point, why should they?
Leave the morals/ethics out of this - this is, and will remain, a businessdecision.
Were I sitting in the White House contemplating my speech this evening Iwouldn't be so <snip>sure that I can bludgeon the company into submission.
There is real danger here for the Obama administration. If it appears thatthe fines and litigation losses will come within reasonable reach of their USassets they may well be better off to draw down the curtain and place the USsubsidiary into Chapter 11 - then let the creditors - including litigants -fight it out for the scraps in a restructuring. They come out with a good partof the liability (perhaps all or most of the fines!) discharged, and voila!
Want to bet they aren't thinking about it?
Oh yes they are. They've hired Goldman and Blackrock, and I don't care whatthey claim - you don't go hiring folks like that for a cakewalk. They've donethis analysis too and they're well-aware of the option - one that there isabsolutely nothing that the Obama Administration cando to prevent.
Congress and President Obama have a political Kobyashi Maru here.
MMS is 100% responsible for approvingthe well casing changes made on the rig - changes that, were they notapproved, would have likely prevented the blowout in the first place.
But MMS is the Obama Administration and thosechanges were approved just days before the blast. And while BP selected thedesign and implementation they used, they didn't do it in a vacuum - they did sowith the full permission of the government's so-called "regulators."
President Obama doesn't want to discuss this, of course. Did you notice thelack of an MMS representative at the hearings today? Guess why? Yep. Startasking about those permits and the rubber stamp at the MMS office, and you'regoing to get a lot of stuttering in response.
BP's chief executive said in the hearing today that he has no intention ofestablishing an escrow account, and frankly, I don't blame him. I also wouldn'tlet a third party adjudicate claims - other than a court, should someone want tosue. That's how it works in this country; being brow-beaten byCongress and Obama sounds good, and I believe BP is culpable for and will beforced to pay huge damage claims and fines - but nonetheless theyare entitled to due process of law, as is everyone.
I wouldn't touch this stock - except as a daytrade orhighly speculative play. With a dividend yield today ofclose to 10% and with all the litigation and fine risk there is certainly apossibility of a dividend cut - or elimination - in the future. With about 40%of its assets in the United States, the firm would be severely-damaged if it cutloose the US subsidiary and walked off.
But calls for debarment of the firm from leases it holds simply expropriatethe assets that the US wants BP to use to pay these claims. The higher the riskof that outcome, the more intriguing erecting the middle finger in the directionof President Obama becomes. And with the firm's stock trading with a current10% dividend, shedding 40% of the assets and literally walking off on theliabilities as those assets dwindle in value starts looking better andbetter.
You may get what you ask for, but it may not be what you actuallywant."