BP is in eye of the storm

The political storm surrounding BP might be abating, but storms literal and financial loom on the horizon.

In the real world, hurricane season has begun, which could make plugging the leaking oil well in the Gulf of Mexico tougher. Financially, a renewed sell-off last week pushed BP’s share price to a 14-year low. It has more than halved since April 20, leaving the company worth about $85bn.

The latest trigger for concern is liquidity: does BP have enough cash to cover a sudden credit event?

It really should not be an issue; BP has about $20bn in cash and credit lines. It has suspended dividends until at least the end of this year, is cutting capital expenditure by 10 per cent and will sell $10bn of assets.

But investors are fretting all the same as they grasp for a handle on the total cost of the incident. BP says expenditure on the response so far is $2.35bn, at this stage a drop in the ocean.

As for future costs, the market is evidently pricing in significant punitive damages and fines, on top of the clean-up costs. Then there is reputational damage. Extrapolating from the discount between BP and its peers that emerged after safety incidents in 2005 and 2006, Nomura estimates this could account for up to $25bn of market value.

Investors may be waiting for the oil to stop flowing and a final assessment of the damage. But in the gap of about $30bn between those cost estimates, the $20bn in the escrow fund and the amount by which BP’s value has been written down, most unpleasant scenarios have been amply priced-in.

For those prepared to brave the risks, substantial value may be revealed when the storm clouds finally pass.

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