Monday, July 5, 2010

BP and the GCC: In the Right Place? Yes. The Right Time? No.

You've probably seen press reports that GCC states - among other "wise" investors - are considering riding to BP's rescue with capital.

At The National Frank Kane muses today whether "the Gulf is in the right place to back up BP".   One cannot question his argument that the Gulf is in the "right place".  Long historical relationships.  Some  historically stormy.  Paging Kermit Roosevelt.   Strong familiarity with the industry.  Lots of money in the pocket.

But before ADIA or another SWF steps forth with a capital infusion a la CitiGroup, it's probably appropriate to ask whether this is the right time.

Promises of a 300% return presume the continued existence of BP.  And unlike Citi BP is not too big to fail. 

Instead the really smart money should be looking to pick off prime assets from a sale now.  Or waiting to join the vultures later when it's time to strip the carcass.  

The total cost related to the Gulf spill (that's Gulf of Mexico) is far from clear.   The relatively simple  part (if one can use the word "simple") is the cost of capping the well and the "clean-up".  More importantly will be the claims for damages.   Much more complex.  There's a strong likelihood that the "tab" will be much more than the US$35 billion that Citi estimated.  Profound and lasting (perhaps permanent) damages.  From the residual oil and the impact of the over usage of dispersant chemicals.  Destruction of wetlands.  Loss of livelihoods - fishing, tourism.  The spectre of a chemical tsunami churned up by a hurricane making large swathes of the coast unlivable. Not just in the Gulf but as well along the East Coast of the United States.   Damages the extent of which may not be apparent for decades. 

In an environment where it is highly unlikely that US citizens or Congress will allow BP to skate away with a slap on the wrist.  Even if that slap is a rather smarting US$35 billion.

What's the way out?

Confronted with mounting and perhaps indeterminable liabilities, BP is likely to perform corporate seppuku - though it's hard to see any honour being redeemed in the act.  A filing for bankruptcy ( a "Pre-Pack") that will neatly inter the Gulf Coast liabilities along with BP's remains.    
Not a particularly smart move to become a shareholder now.  All that one is likely to get is  a front row seat when Last Post is played and the BP flag taken down.  A rather expensive ticket to a rather dismal event. 

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