16 June 2010
16 June 2010
BP is extremely strong financially, despite the huge number of compensation claims following the oil spill. An additional payment of $20bn into an independently administered victims’ account of the incident over a period of three and a half years should be seen in the context of over $30bn in cash flow which the company should generate from current oil prices this year alone. In this context just under $8bn to cover three quarterly dividend payments seems relatively small, but the political ramifications were clearly too pricey.
The board has decided that the gearing should remain at the bottom end of the range given there is no cap on the size of the victim’s fund and therefore it has decided to sell $10bn worth of non-core assets rather than increase its debt. BP’s current financial position has changed little from that in Q1 when it had $5bn in cash on its balance sheet and $10bn of unused debt facilities. While the ultimate sanction for the US government is the seizure of BP’s US assets we do not believe it will come to this, neither do we believe that BP needs to go into bankruptcy.
BP is the largest oil producer in the Gulf of Mexico and the near doubling of its production in that area will play a key role in reducing the US’s dependence on foreign oil. The sensible course is to let BP solve the problem of the leak and then sort out all the liabilities over the long term. The best way to do this is to keep BP as a growing concern.
The stock market has already priced in a doomsday scenario, so while the near term is going to be stormy, we think investors should stick with the shares. See full document
For further information please contact Iain Armstrong, Equity Research Analyst on 0845 213 3353