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Analysts still feel BP can cover Gulf costs

Wall Street analysts continue to believe that BP can pay for its mess in the Gulf, although their confidence level has been dinged by the company's inability to stem the spill.
Image: BP stock chart
This chart shows the performance of BP's stock during the last year. Trading volume has been particularly heavy since the Deepwater Horizon
/ Source: The Associated Press

Wall Street analysts continue to believe that BP can pay for its mess in the Gulf, although their confidence level has been dinged by the company's inability to stem the spill — and the political fallout.

Shares of BP PLC rose more than 10 percent Thursday, recouping some of the previous day's steep losses. But at $32.20, the shares are still trading at levels last seen 14 years ago.

Spurred by pressure in the U.S. to fully compensate economic victims of the Gulf spill — and by Wednesday's nearly 16 percent stock plunge — BP officials early Thursday reiterated that the company has enough cash to cover the costs of the Gulf spill. Analysts agree, saying that BP will have around $5 billion this year to pay damages and clean-up costs once dividends and capital expenditures are covered.

BP has already spent more than $1.4 billion trying to contain and clean up the oil and pay claims to Gulf coast businesses. To date, almost 42,000 claims related to the spill have been submitted and more than 20,000 payments already have been made, totalling over $53 million.

Because of BP's strong cash flow, analysts currently doubt that the costs of cleaning up the mess will push the company into bankruptcy.

"Bankruptcy protection would only make sense to protect assets from unquantifiable liabilities, while conducting business without the distraction of lawsuits," Oppenheimer & Co. analyst Fadel Gheit said in a research note Thursday. His worst-case scenario for financial damages and penalties is more than $60 billion, which would be paid out over several years.

"Driving BP out of business, however, would not clean the Gulf Coast, pay plaintiffs or help its 23,000 U.S. employees, and more retirees," he said.

But analysts do have growing concerns. While the potential cost of the spill grabs headlines, many on Wall Street agree that what BP can least afford is permanent damage to its U.S. business. Citi Investment Research notes that the U.S. is the most valuable market for BP's exploration and production business and contributed about 31 percent of that group's $18.84 billion in operating profit in 2009.

"There is no question that BP needs to do the right thing in the US and protect whatever franchise is left," after the Gulf incident is resolved, Citi analyst Mark Fletcher said in a research note.

Argus Research analyst Phil Weiss points out that besides the leases in the Gulf of Mexico, BP's business in the U.S. includes Pentagon contracts, shale gas assets and two large refineries. If the U.S. government were to restrict BP's ability to do business in this country, that could hurt the oil company's ability to remain a stand-alone company.

Weiss said Thursday's run-up in the share price was bargain-hunting after investors overreacted to some bad news on Wednesday.

Shares of BP jumped $3.60, or 12.3 percent, to $32.80 in afternoon trading in New York. Shares dropped as low as $29 the day before — the worst day for BP shares since the Deepwater Horizon rig exploded more than seven weeks ago — and the lowest price for the stock since August 1996.

Wednesday's losses cut the company's market value in half since the blast, a drop of $90 billion.

Political pressure is building on BP to slash its dividend or suspend it altogether until the well is capped and hundreds of miles of coastline have been cleaned up. Goldman Sachs expects BP to forego dividend payments for the second and third quarters and resume them at reduced levels in the fourth.