Can BP Survive? - TheStreet

Can BP Survive?

It's no longer just about BP containing the oil spill, but whether BP, as a company, can survive the oil spill crisis.
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(BP poll updated with latest events in Gulf of Mexico oil spill)

GULF COAST, U.S. (

TheStreet

) -- The

BP

(BP) - Get Report

effort to take control of the oil spill in the Gulf of Mexico has led to an existential crisis for the oil giant, including all the manic highs and dreaded lows expected as part of existential angst.

On Thursday morning, there was the latest sign of optimism in the BP effort, mixed with the usual amount of caution and fear that trouble could rear its ugly head again, and soon.

BP successfully freed the saw that had become stuck in the riser pipe on Wednesday and completed a second critical cut. However, the cut was not made according to plan after the problems freeing the stuck saw.

BP conceded that the irregular cut could mean more oil leaks into the Gulf of Mexico than anticipated, even with a successful containment dome in place. U.S. Coast Guard Rear Admiral Thad Allen said that the lowering of the containment dome, scheduled for Thursday, would be trickier than previously anticipated.

The U.S. government had already predicted that an increased oil flow of as much as 20% could be unleashed by the cut riser pipe.

The critical question inherent throughout the failed BP effort to contain the oil spill, has been:

Can BP stop the oil from gushing out of the deep sea well, or at least contain the worst of the damage?

After the top kill failure coming out of the Memorial Day weekend, though, and with the more recent successes followed by setbacks in the deep sea sawing effort, the big question about BP seemed to transition to one about survival.

Additionally, when the U.S. government has to publicly state that it won't use a nuclear bomb as a method to stop the oil spill, as it did this week, it becomes clear -- if it wasn't already -- that the oil spill has become a desperate situation.

BP CEO Tony Hayward recently remarked that he wants the oil spill contained as much as anyone, and in what has quickly become a foot in his mouth moment, Hayward said he "wants his life back. Still, we are not talking about Hayward's survival, but referring to the life of BP as a company:

Can BP survive the oil spill crisis?

It's no longer about "Beyond Petroleum" or even British Petroleum -- but about an oil company buried in problems about its financial strength given events in the Gulf of Mexico. The existential oil industry question was inherent in the heavy selling in BP shares on Tuesday, which rippled through the energy sector, and the oft-quoted data point that BP has now lost one-third of its market value since the oil spill began, or close to $70 billion.

>>BP Oil Spill Update: Top Kill Fails, What Now?

By Tuesday of this week, after the top kill was a dead deal, analysts had gone overnight from a buy to a sell on BP. Dougie Youngson, an analyst at London-based Arbuthnot Securities who lowered BP from buy to sell on Tuesday, said the question is not whether BP CEO Tony Hayward will survive the oil spill, but whether BP the company will.

The London-based analyst is now of the opinion that the U.S. government will have to take an even harder line than the proposed hard line against BP, as well as all offshore drillers -- and that the regulatory risk is the real grim reaper of the oil spill crisis. On Tuesday, President Obama sent Attorney General Eric Holder to the Golf Coast for the first time since the BP oil spill began to meet with federal prosecutors and states' attorneys, and to begin looking into potential criminal charges in the BP oil spill. Attorney General Holder officially announced a criminal probe on Tuesday afternoon.

BP Oil Spill Poll

Click here to go directly to the BP Oil Spill Poll

BP's woes have dragged down all the oil stocks, starting with

Anadarko Petroleum

(APC) - Get Report

, which owns 25% of the BP well -- and 25% of the liability. Shares of oil rig operator

Transocean

(RIG) - Get Report

, manufacturer of the failed blowout preventer

Cameron International

(CAM)

, and deep sea engineer

Halliburton

(HAL) - Get Report

have all been hit hard.

Offshore oil rig operator Transocean is down by an even greater percentage than BP since its oil rig exploded on April 20, as the fate of the entire U.S. deep sea drilling business remains uncertain.

If BP is found to be negligent in the oil spill, any cap on damages goes out the window -- even the $10 billion cap that Congress is now trying to push through as part of new legislation to punish BP.

Deutsche Bank analyst Lucas Hermann estimated on Tuesday that the Gulf of Mexico accounts for 14% of BP's estimated 2010 production. The Deutsche Bank analyst indicated that a 1% rise in Gulf of Mexico royalties, a six-month drilling moratorium and a 20% increase in drilling and completion costs would take a near-$2 billion out of BP's bottom line in 2010. If the U.S. moratorium on offshore drilling extends beyond six months, or other countries decide to follow the U.S. lead in banning offshore drilling, the toll on BP's operations becomes even greater.

>>Oil Spill in Pictures

BP generated $27.7 billion in cash from operations in 2009, yet its annual dividend costs more than $10 billion and its capital spending campaign more than $20 billion annually.

Analysts estimate that BP will have $30 billion to $35 billion in cash flow this year and next year -- and, as a result, the oil giant does not face an immediate cash crisis.

BP can always slash its dividend and cut back on capital spending. BP CEO Hayward was expected to hold a conference call with investors on Friday to reassure them that BP can manage the financial aspects of this crisis. U.S. politicians have been making a political weapon of the BP dividend payment, the highest in the oil industry, as politicians also made a big issue of Transocean's plans to raise its dividend, a policy changed formulated before the oil spill.

A BP dividend cut is expected by many analysts, of up to one-third its current level.

Credit Suisse released the latest estimate for the potential liability to BP on Tuesday, saying the oil spill could cost BP $37 billion by the time all is said and done. Estimates have ranged as low as $10 billion to as high as $37 billion.

All of the market chatter has given rise to the question,

Can BP survive as an independent company, or will its financial position be so weak that it is inching towards becoming a takeover target?

BP's debt-to-total assets ratio was 19% at the end of fiscal 2009, and it has room to tick its debt plate without becoming immediately overburdened.

By Thursday, some analysts were saying individual assets sales by BP were more likely than a takeover. For one, BP is still a$118 billion company and there are only a handful of companies that could even afford an acquisition, and it is not the kind of acquisition the big oil companies have been making, not even taking into account the ongoing liability inherent in BP that would be toxic for any suitor.

If there was a prized BP asset for BP to consider in a sale to shore up its finances given the unquantifiable costs stemming from the oil spill, a likely target would be BP's stake in the Prudhoe Bay, Alaska oil reserve.

BP has many individual assets, from Marcellus shale stakes it recently acquired in a joint venture with

Chespeake Energy

(CHK) - Get Report

, to its now-ironic recent $7 billion purchase of deepwater assets from

Devon Energy

(DVN) - Get Report

, a deal which includes assets in the Gulf of Mexico.

BP Oil Spill Poll

Click here to go directly to the BP Oil Spill Poll

Last week, many investors thought BP had reached a floor value in share price -- in the low $40s -- at which point it was an "obvious" value play. Yet it is safe to assume that a significant amount of the "floor" theory in BP shares was tied up with hopes that the top kill would work, and comments from BP and government officials that the top kill was, in fact, working. On the first day of the top kill, when BP announced some "success", BP shares surged 8% before falling just as quickly when it became apparent that the top kill optimism was misguided.

Also, BP officials have stated the same level of optimism with every failed effort to contain the oil spill, and last week, the effort to make it seem as if the top kill was working was a tortured affair. As late as Friday, BP CEO Tony Hayward was still saying that the top kill was "proceeding according to plan."

Yet Hayward had said at the beginning of last week that BP would be able to judge the top kill's success or failure by Thursday. On Friday, shortly after Hayward said the top kill was proceeding according to plan, BP suspended the top kill for the second time in as many days. BP engineers said there was no reason to read the temporary suspensions of the top kill as negatives -- yet, lo and behold, by Sunday, BP had conceded defeat in the top kill effort.

Has BP just been buying time, floating optimism about every oil spill containment technique at its disposal with the intent to deceive? Or is BP a victim of its own lack of expertise operating at 5,000 feet beneath the surface of the ocean, and is simply putting its best face forward? Maybe the truth is a little of both; regardless, the bottom line is that BP's words simply can't be trusted.

Again on Tuesday, as BP focused its efforts on the LMRP containment technique, the BP optimism was in the air, albeit with more caveats.

Doug Suttles, BP chief operating officer and No. 2 Oil Spill Optimist behind BP CEO Tony Hayward, said about the LMRP containment effort that there was no guarantee it would work, but added, "I'm very hopeful."

By Thursday morning, the latest BP attempt was riddled by setbacks and its best-case scenario for success would contain less oil than BP originally had forecast.

The top kill failure fundamentally changes the nature of what BP can even accomplish, in the best-case scenario. There's an old

Sportscenter

catchphrase from Dan Patrick that sums it up: You can't stop the oil spill, you can only hope to contain it.

The new BP effort, LMRP containment, involves slicing through the underwater well riser pipe and lowering a dome over the exposed gusher to siphon off oil to a drillship on the surface of the Gulf of Mexico. It highlights the fact that until BP finishes drilling relief wells in August, the well will keep gushing oil into the Gulf, at a rate now assumed to equal 20 million total gallons of crude.

Additionally, the LMRP containment effort wasn't tried until now because of its high risk nature: cutting the riser pipe will actually lead to an increased flow of oil coming out of the underwater well. On top of that, with hurricane season officially open in the Gulf of Mexico, storm conditions could force BP to pull the LMRP containment dome off the cut pipe and that would lead to an unimpeded flow of oil back into the Gulf.

The U.S. government estimates that cutting the pipe -- which began on Tuesday -- will unleash an additional 20% of oil flow from the BP well.

BP Oil Spill Poll

Click here to go directly to the BP Oil Spill Poll

The ultimate oil spill "fail safe," which has been accepted without reservation, is that BP's relief wells will stop the oil spill. Yet David Rensick, president-elect of the

American Association of Petroleum Geologists

, told

Bloomberg

on Tuesday, June 1, that the chances of the BP relief well working on the first shot are equivalent to the odds of winning the lottery. Resnick called initial failure "almost a certainty", saying that drilling the well is the easy part, but intersecting with the existing well is a significant challenge.

There is a reason that BP was down 15% on Tuesday and to yet-another new 52-week low, even though it has recovered on Wednesday and early on Thursday slightly as the equities markets rallied. There is a reason that there were more than 199 million shares of BP traded on Tuesday, more than four times its daily average trading volume. There has been only one day since the Deepwater Horizon oil rig exploded on April 20 that more shares of BP have been traded, May 3, when more than 156 million BP shares were traded.

Yet given BP's slide to another oil spill low share price on Tuesday, some market watchers will no doubt say that now the floor has really been reached in BP shares.

Will the offshore drilling industry come to be demarcated by the historical eras of Before the BP Crisis and After the Death of BP?

The ultimate floor in BP shares was the question running through all the speculation on Tuesday:

Will BP survive?

Take our poll below to see what

TheStreet

has to say -- and don't forget to leave a comment, to tell the world what

you

have to say.

-- Reported by Eric Rosenbaum in New York.

RELATED STORIES:

>>BP Oil Spill Update: Top Kill Fails, Now What?

>>Oil Spill in Pictures: Gulf of Mexico Impact

>>Oil Spill Losers: BP, Anadarko

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