Many people will tell you BP (LON:BP., NYSE:BP) is a walking bankruptcy. But I believe the media has castigated “BP the company” based on the idiocy and arrogance of its current management, without reviewing the logical outcomes of what might happen with BP. Let's see if we can't assign a reasoned probability to those outcomes.
Clearly, current BP management has had a culture of conceit mixed with a cockiness that passes for aggressiveness among wildcatters. “Let’s push the frontiers,” was their ruling creed. “After all, we are the best.” I think if they were ever asked, “What about responsible stewardship?” their response might have been, “That’s what the PR Department is for.” Well, no more. This shoot-from-the-hip management team is on its way to oblivion.
But now let’s take a look at BP, the company. The company directly responsible for the oil spill cleanup is BP subsidiary BP America. A reminder: BP America grew its resources and distribution network hugely 10 years ago when it acquired 100% of ARCO, from whom many of us in the Western states still buy our gasoline.
Worldwide, BP is a company that generated $145.4 billion in cash flow from operations over the past 5 years. Credit Suisse has analyzed the most likely outcomes for the cost of the oil spill cleanup, liabilities, obligations, fines and penalties. While we can count on the media to try to out-do each other with estimates of $50 billion, $70 billion, $140 billion, etc., Credit Suisse has done actual "analysis" and believes the cost will be up to $37 billion. Let’s bump that up by another third and say it will be even higher, at $50 billion. If that’s the case, the total cost to BP will be about 20 months of current cash flow.
Credit Suisse further estimates that BP the company (ex, I imagine, Tony Hayward and a few others) will generate $184.7 billion over the next 5 years. If their estimate is close to accurate, that reduces the cost of the cleanup and extended liabilities to about 16 months of cash flow.
Could BP be forced into bankruptcy by lawsuits, fines and penalties? It could be, but given the above cash flow numbers, I see that as unlikely. In addition, if backed into a corner by an administration more interested in finger-pointing and finding a scapegoat…
