For as long as the Macondo well continues to spew oil into the Gulf of Mexico, concerns about BP’s financial position will remain high.
The company is trapping about 25,000 barrels of oil a day from the well, suggesting that, on the basis of the US government’s best guess of the total size of the leak, about 10,000 barrels a day are still escaping, adding to the huge slick that stretches along hundreds of miles of the Gulf coast from Louisiana to Florida.Each extra barrel that spills adds to the cost of the clean-up, the potential penalties that BP will face and the economic losses suffered by the fishing and tourist industries that will have to be compensated.
Although BP generates a huge amount of cash with oil prices at their present levels, the market is still concerned about its financial strength in the face of rising liabilities.
So it is only natural that BP is looking at a range of options for improving its liquidity.
Its problem is that very few sources of finance are open to it at the moment. Since the failure of its attempt to use a “top kill” – pumping drilling fluid down the well so it can be cemented over – at the end of May, the markets have become alarmed about BP’s financial position.
The shares have hit 14-year lows, its bonds have also fallen sharply, and the price of its credit default swaps – the cost of insuring the company’s debt against default – have soared. Its debt has been downgraded by all the major rating agencies, pushing up the cost of its borrowing.
The UK oil producer is not in a position to make a significant difference to its financial position until its second-quarter results on July 27 at the earliest, when it will give some idea of the total bill it is facing. More crucial to investor confidence is the success of BP’s latest plan to stop the leak – a relief well, which is scheduled for completion in August.
In the near-term, the company is not facing a liquidity crisis. The agreement it reached with the White House in mid-June, which gave it three-and-a-half years to pay into a $20bn (£13.2bn) fund to compensate victims of the spill, has bought BP precious time.
By suspending the dividend for the rest of the year and cutting capital spending, it is freeing about $10bn of cash, and plans another $10bn of disposals during the next 12 months.However, a rapid escalation of liabilities, or a squeeze on cash flows caused by a fall in the oil price, could still force it to raise new funds.
Doing that in the form of new equity looks out of the question. BP has ruled out selling new shares, whether in a rights issue or by a private placing to a strategic investor.
At its current share price, it would be highly dilutive to existing shareholders. The prospect of a “cornerstone” shareholder who would defend BP against a bid would also be unwelcome to many investors.
A bond issue, similarly, would be very expensive at present prices. So for the time being, increased bank lending looks like BP’s only option for raising outside finance.
If all goes well, and the relief wells allow the leaking well to be plugged as planned, then BP hopes bond market conditions will improve enough for it to be able to launch an issue.
Expectations that the company will be able to reach that point have been rising during the past two weeks. Signs of calm have been returning to the markets: BP’s CDS prices, which were above 600 basis points, were at 445 basis points on Monday, according to Markit, the information provider. Its shares have risen 9 per cent from their low point 10 days ago.
There may also be news on asset disposals before the end of the month, further helping sentiment.
Jason Kenney, an analyst at ING, said: “I doubt the massive discounting of BP will prove correct. It is a scared market currently, but sense will prevail once the leak is stopped and the quantification process and litigation begins.”
Until that happens, however, it is likely to remain a very nervous time for BP.
Source : ft