The drilling of the relief well in the Gulf of Mexico continues to hold our attention. But in the aftermath of the spill and – as pointed out several times here at the Econotwist’s Blog – the fate of BP’s global assets may provide the greatest long-term complications.
“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.”
Dr. Kent Moore
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 a new round of mergers and acquisitions that are taking place anyway in the oil and gas sector due to rising volatility and the inability of some to withstand the uncertainty. So, the Big Oil are about to get much bigger – except for BP, of course.
BP are likely to emerge from the mess it created in the Gulf as a smaller, leaner, and hopefully, wiser company.
“Though, having been an adviser to these guys on three continents, I would not hold my breath on that last one,” oil industry expert Dr. Kent Moore writes in a recent newsletter.
But 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, Halliburton, Anadarko Petroleum and Cameron International.
Dr. Kent Moore
“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,” Dr. Moore writes
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.
Here’s The Basic Problem
BP will be spinning off assets. They have 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 securing bank credits, for that matter…
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.
BP To Become RP?
And that has some governments concerned. Like the Kremlin, for instance.
Trouble in Russia… Vietnam… 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, for one, has been flying circles overhead, waiting to see if the patient dies.
(According to the Norwegian oil industry expert professor Øystein Nordeng, Statoil is also hunting for leftovers from the BP cadaver.)
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 as collateral for that Credit Suisse loan, mentioned above.
Russian officials literally called Hayward on the carpet and demanded to know what the company’s overall strategy was going to be.
From Russia With...Nothing
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.
Don’t be surprised if the Russian partners in TNK-BP end up buying the whole package outright…
Needs Cash – Now!
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,” Mr. Moore comments.
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.
Here’s cash the only thing that matter – no fancy stock swaps allowed in these transactions!
The Harder They Come, The Harder They Fall
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,” Dr. Kent Moore concludes.
But there are those living in the Gulf States who might have a word for that – “Justice”.
Here’s more from Dr. Kent Moore: “How To Play In The Big League”
Related by the Econotwist:
BP Collecting Millions In Government Stimulus Funds
BP’s Oily Aftermath – Colbert Style
So, You Thought BP Was An OIL Company?
Response To The BP Derivatives Story
New CEO Isn’t the Long-Term Answer at BP, Expert Says
Statoil May Buy BP Assets, Expert Says
BP Rules Out Issuing New Shares
Norway’s Oil Fund Among BP’s Largest Shareholders As Bankruptcy Rumors Hit Market
Fears Of Oil Spill Consequences Subside, CDS Spreads Show
EU To Seek Temporary Ban On Deep-Water Oil Permits
Gulf Oil Spill: A Carefully Planned Inside Job?
Readers Response: The BP Conspiracy
Oil Spill Makes Waves
BP Is Drowning In Its Own Oil Spill