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BP’s Got Money Problems

by | published August 23rd, 2010

The drilling of the relief well in the Gulf of Mexico continues to hold our attention. But in the aftermath of the spill, the fate of BP‘s (NYSE:BP) global assets may provide the greatest long-term complications.

Selling its assets is one way for BP to put together the funds needed to pay its expected liabilities. Those sales are moving right into the teeth of a new round of mergers and acquisitions (M&A) taking place anyway in the oil and gas sector, due to rising volatility there and the inability of some to withstand the uncertainty.

The big are likely to get much bigger before this all sorts itself out.

Except, of course, BP. In that case, the company emerging from the mess it created in the Gulf will be smaller, leaner, and (one would hope) wiser. Though, having been an adviser to these guys on three continents, I would not hold my breath on that last one.

They do, however, have an overall plan.

Public attention remains focused on the $20 billion fund for compensation and the payments that are beginning to be made from it. Yet the BP brain trust has decided the aggregate liability could well extend to $50 billion. At least that seems to be the line they are drawing on the courtroom floor, as they move into years of litigation, assessing of damages, and counter-suits with other affected companies – Transocean Ltd. (NYSE:RIG), Halliburton Co. (NYSE:HAL), Anadarko Petroleum Corp. (NYSE:APC), and Cameron International Corp. (NYSE:CAM).

My sources high up in BP are clear about one thing: The company has three ways to raise that kind of money… and they are moving on all three fronts.

How BP Will Raise $50 Billion

BP is acquiring lines of credit in the amount of $15 billion to $20 billion, one already secured from Credit Suisse (more on that one in a moment). Then they plan to obtain between $15 billion and $30 billion from the sale of assets. And, finally, they will either issue a supplemental placement for the remainder in BP common stock or float bonds.

Of course, the more they have to rely on this last option, the more they are effectively diluting existing shares or mortgaging future cash flow. Support from sovereign wealth funds, especially those in the Persian Gulf, may temper that somewhat. After all, a private placement with a buyer not interested in reselling the shares anytime soon would be the preferred approach, as would bonds with a likely rollover potential.

Yet here’s the basic problem.

BP will be spinning off assets (and has already done so in several parts of the world). Moving forward, that reduces the company’s profit base – not a preferable environment for issuing additional shares. Or, for that matter, for securing bank credits. Because in addition to the assets it puts on the auction block, BP will need to tie up other assets as collateral for the loans it will take out.

And that has some governments concerned. Like the Kremlin, for instance.

Trouble in Russia… and Vietnam… and Venezuela

About-to-be-replaced CEO Tony Hayward (you remember, the poor fellow who wanted his life back) was jetting around the Persian Gulf looking for financial support to avoid either a collapse or a takeover – Exxon Mobil Corp. (NYSE:XOM), for one, has been flying circles overhead, waiting to see if the patient dies.

In the middle of the trip, Hayward was summoned to Moscow.

Officials there were livid. BP used a stake it owns in their state-controlled oil giant Rosneft (LSE:ROSN.UK; OTC:RNFTF) as collateral for that Credit Suisse loan I mentioned. Russian officials literally called Hayward on the carpet and demanded to know what the company’s overall strategy was going to be.

Here’s one clue that you are in hot water with the government: You come into town as one of the major foreign investors in the country, yet neither President Dmitry Medvedev or Prime Minister Vladimir Putin has time to see you. For BP and Hayward, the best they could rustle up was Deputy Prime Minister Igor Sechin, who has oil and gas in his portfolio.

Now, Sechin is a no-nonsense administrator. He had a great concern in assessing BP’s intentions: the fate of the half BP owns of one of Russia’s top five oil producers, TNK-BP (the investor’s play is with the holding company actually controlling the joint venture’s assets – OTC:TNKBF).

The Kremlin apparently received the assurance they were looking for – BP will not be selling its holding abroad. But don’t be surprised if the Russian partners in TNK-BP end up buying the package outright…

BP needs to raise cash quickly, and for that to happen, it will need to select assets carefully and sell them at a discount.

Plus, the Russian government is always paranoid about national resources being owned by foreign parties. And then there is the curious fact that TNK-BP is uncomfortably grandfathered under a new Russian statute. The venture controls strategic fields that, the law says, can have foreigners owning only minority positions.

And there is BP, sitting out there like a sore thumb, owning half of all of them.

Recognizing that BP is in an untenable position, some other governments are not waiting. Vietnam has decided that BP will be removed as operator in a new offshore project. Hanoi is actively shopping around the position to other international majors.

And then there is Caracas…

TNK-BP was one of five Russian majors banding together in a major deal to develop fields in Venezuela’s Orinoco heavy oil belt. BP is pulling out, under pressure from President Hugo Chávez.

In areas as far-flung as Columbia, Texas, Egypt, Pakistan, and Alaska, BP has sold (or is planning to sell) its production assets. Cash only, please – no fancy stock swaps allowed in these transactions. The sales may end up accounting for more than 10% of the company’s about $250 billion in worldwide assets and reduce the company’s production figures by at least that much.

This means that the money problems facing the company may be the longer-term problem in the aftermath of the Macondo spill. The production assets BP has to relinquish to survive could end up plaguing the company’s bottom line long after it has settled the lawsuits.

But there are those living in the Gulf States who might have a word for that…

Justice.

Kent

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  1. H.Craig Bradley
    August 26th, 2010 at 16:27 | #1

    BP’s COMPANY BAGGAGE: CAN IT BE CLEANED-UP?

    Indeed BP is getting a haircut. BP, as it turned out, has not been managed very well, particularly its Corporate “risk management”, assuming they even had one. Now, shareholders are paying for it.

    Before the Gulf Spill, I really though of BP as just another big oil company. Obviously, not all large oil companies are the same. Behind BP’s rich dividend lurked unnoticed risk.

    A common thread today is how to manage stock portfolios in a down market (bear market?). It is felt by some that high quality, dividend paying stocks are the way to go. Such quality companies generally exhibit less volatility and may hold up relatively well during a period of possible deflation, yet to be fully realized. BP was once one of such a class of stocks, but not any longer.

    BP without a dividend is an unknown risk not worth owning in a in view of a further market decline, or a series of them. Not only is the amount of its future oil production and profits in question, but so are it’s dividend rate, provided the stock dividend is reinstated sometime in the first part of 2011.

    However, it may not be the same 6% dividend shareholders had come to expect. Instead, it may be more in line with better managed oil companies like EXxon at 2.9%. Perhaps Exxon will do BP shareholders a big favor and acquire it, either in a “friendly” or “hostile” takeover. BP, like CEO Tony Hayward, have seen their good name tarnished and in some corners of the world, become a “persona non grata”. Such a corporate oil merger would clean-up all the baggage which now automatically goes along with the name “BP”.

  2. jamesbettis
    August 26th, 2010 at 22:53 | #2

    in my mind BP should not sell off assets with the money managers of the world you could get a good deal with loans. a loan for amortization of ten years could obtained for less than (5)% and in three years that loan could be reinstated. but in mean time you could gain more than 5% just selling oil, or oil leases. Sincerly:
    james bettis

  3. dick mcclure
    August 27th, 2010 at 00:49 | #3

    So, what is your relevant advice?

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