BP heading for chapter 11?

It has been 50 days since the Deepwater Horizon oil rig caught fire and sank off the Louisiana coast, killing 11 workers and crippling the riser pipe that was extracting oil four miles within the earth's crust. BP have tried several reactionary methods to stem the flow, from 100-ton domes, robotic submarines, top kill and most recently, severing the riser pipe in an effort to attach a Lower Marine Riser package, all of which have proved unsuccessful.

Things couldn't get any worse for BP, except apparently they can. Hurricane season is fast approaching, which energy investor Matt Simmons of boutique investment house Simmons & Co feels could take the crisis to an even higher level. "There's a lake at the bottom of the Gulf of Mexico that's over 100 miles wide and at least 400 to 500 feet deep of black oil," says Simmons, and a hurricane could cause that lake to "paint the Gulf Coast black."

BP's shares have taken a hit, which is no surprise. BP are off $4.20, or 12 percent, at $30.50, extending rather dramatically their slide from the late morning, apparently prompted by some pretty harsh views expressed Simmons.

"[BP] have about a month before they declare Chapter 11. They're going to run out of cash from lawsuits, cleanup and other expenses. One really smart thing that Obama did was about three weeks ago he forced BP CEO Tony Hayward to put in writing that BP doesn't have enough money in the world to clean up the Gulf of Mexico. Once BP realizes the extent of this my guess is that they'll panic and go into Chapter 11."

Possible Chapter 11

It is unbelievable to think that the mighty BP, with a 2009 revenue of $246.1 billion and net income of $16.58 billion could be heading for chapter 11, but its also unbelievable to think that according to some reports, the crisis could continue until Christmas. It's got so bad, friendly nukes have been brought up in polite circles as a means to stem the flow of oil.

According to The New York Times's Andrew Ross Sorkin in an article for dealbook, the idea that BP might one day file for bankruptcy, particularly as part of a merger that would enable it to cordon off its liabilities from the spill, is starting to percolate on Wall Street. Bankers and lawyers are already sizing up potential deals (and counting their potential fees).

Initially the Obama administration was quick to criticise BP and the rig owner Transocean for shirking responsibility and placing the blame on each other as the catastrophe escalated. Throughout the process, the government made it clear that BP would pay for the mess in reputation and dollars.

How much BP are losing

As the rainbow sheen lengthens across the Gulf of Mexico - now over a third - the financial implications increase. BP are losing around $10 million a day, solely on the oil that is finding its way into the ocean, let alone the recouping costs of stemming the flow and cleaning up the spill; something the Obama administration has been keen to highlight. On top of that, BP could face an additional $14 billion in claims from gulf fisherman and the tourism industry and owes about $12 billion in cash and short-term investments.

The big kicker - being called 'the Texaco' effect on Wall Street after Texaco was forced to file for Chapter 11 because it could not afford to pay a jury award worth $1 billion to Pennzoil - could be a jury verdict against BP. Such a verdict might push the cost of the spill into the hundreds of billions. If that happened, even the mighty BP might buckle.

Companies like Shell and Exxon Mobil are sniffing a possible take-over, one in which BP would file a prepackaged bankruptcy and separate the costs of the clean-up into a separate corporate entity.

Despite the oil sharks circling BP, CEO Tony Heyward assured the 92,000 BP employees that "the strength of cash-flow generation in recent quarters has provided us with a balance sheet that allows us to fully take on the responsibility for the Gulf of Mexico response."

I guess only time will tell.

Access Management and Control | Counting the costs - Risk & Compliance | European unemployment

Like this article? Get the RSS feed: