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By Marine Cole
BP's financial condition will be greatly weakened as a result of the oil spill in the Gulf of Mexico, especially its free cash flow and its ability to raise debt at attractive levels as it used to.
But while a complete answer on the final costs for the company won't be available for years, analysts say the company can survive likely civil liabilities. But they're far less certain about BP's prospects in the event the Obama administration pursues criminal charges.
The company said Monday it paid $2 billion so far as a result of its oil spill in the Gulf of Mexico. That cost covers its response to the spill, including containment of the oil, relief well drilling, grants to the Gulf states, claims paid and federal costs. At the demand of the US government, it also set up a $20 billion fund to pay claims over the next three and a half years.
It's too early to estimate the total clean-up costs and fines as oil continues to leak. Rough estimates have been calculated from the low double digits, according to conservative experts, to over $56 billion -- with over half due in the next year -- as mentioned in a recent Reuters article.
Raising cash through the debt market will prove to be increasingly difficult for the company considering the three main credit ratings agencies downgraded BP last week by several notches. They kept ratings in the low ranks of the investment-grade category and on review for additional potential cuts, which means there's a possibility it could be rated junk.
In the long run, the final bill, which will be much higher than $20 billion, will create an overhang on BP's creditworthiness that will persist for years to come, according to Moody's Investors Service, which cut BP three notches to A2 last week. Fitch Ratings downgraded BP to BBB, only two notches above junk.
But there are ways other than the credit markets for the company to fund itself. First, BP is set to generate free cash flow of over $30 billion in 2010 and close to $35 billion in 2011. The cut in dividend payments that the company also announced will help. This year alone, the move will help the company make the $5 billion payment it owes under the $20 billion commitment fund. BP paid $10.5 billion in dividends in 2009.
BP also plans to reduce its capital investments, which was projected to be $20 billion in 2010, and to accelerate asset sales, which could bring as much as $10 billion over the next 12 months and a total of $20 billion over the next two years.
The company also still has more than $10 billion of bank loans still available, despite its $25 billion of debt outstanding as of the first quarter. BP could also renegotiate a larger loan from banks, analysts say.
Even with a weaker credit profile, BP is already planning to raise $10 billion of bonds, which could be issued as soon as this week, according to some reports.
But there are also longer-term uncertainties that could increase the bill considerably as a result of the federal criminal investigation the Justice Department is undertaking. It's also not yet clear whether BP will be the only company to have to pay or whether US oil company Anadarko, which co-owned the license to exploit oil on the platform that exploded, will also be forced to share the costs.
"If findings from the technical investigation lead to the company being found solely liable, that could adjust the range of the potential liability outcome," Simon Redmond, a credit analyst with Standard & Poor's in London, told CFOZone.
Other uncertainties that could further impact the financials of BP include a possible decrease of the price of oil and a strong hurricane season.
Only one thing is sure at this point, potential liabilities will continue to mount as long as the
spill continues.
With the $20 billion fund commitment, "we see the near-term pressure as having been partially addressed," said Redmond, but he added that over time, even decades, other material costs could arise.
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