Which way forward for BP?
In June, financial markets were briefly pricing a bankruptcy of BP in the next five years as an odds-on probability as a result of the ongoing oil spill in the Gulf of Mexico.
Things are not so bad now.
BP's share price - which had more than halved since the Deepwater Horizon oil rig explosion in April first triggered the company's woes - has staged an impressive recovery in recent weeks.
Yet talk continues to circulate of a possible strategic investor in BP - either as a welcome provider of fresh capital to the company, or an unwelcome opportunist sniffing a bargain.
So what are the options now for BP?
On 16 June, the cost of buying financial protection for one year against a possible debt default by BP reached a staggering 10%.
End Quote Alan Sinclair Oil and gas analyst, Seymour Pierce
I think markets are [pricing in] a scenario considerably bleaker than will prove to be the case.”
During those panicky days, credit markets were in effect saying that a BP bankruptcy in the next few years was more likely than not.
Things have calmed down since then, although the oil giant's bonds still trade at prices comparable with companies rated "junk", even though the credit rating agencies have yet to actually stick that ignominious label on BP.
The about turn has been extraordinary. Before its money and reputation began bleeding away in the Gulf of Mexico, the oil giant was considered the safest of blue chip companies, because its debts were so low and its income so high.
"I think markets are [pricing in] a scenario considerably bleaker than will prove to be the case," says Alan Sinclair, oil and gas analyst at stock brokers Seymour Pierce.
He points out that just by cancelling its remaining dividends this year, the company should already have enough money in hand to cover what he expects to be the $6bn (£4bn) direct cost of the clean-up.
That is about double what the company has already forked out to date.
"If you add in all the civil liabilities... I would be surprised if it comes to more than the $20bn they already agreed to set aside," Mr Sinclair adds, on the assumption that the relief wells currently being drilled succeed in stopping the leak in August.
The company could seek ways to limit its liability to the oil spill.Continue reading the main story
There is already a statutory limit under US law for oil spill costs of a mere $75m, but BP long ago waived this limit, as hiding behind it would have been politically untenable.
However, BP had two co-investors in the Deepwater Horizon well - Anadarko of the US and Mitsui of Japan - who together own 35% of the project.
The UK company has called on its partners to pay their share of the spiralling costs, and Mr Sinclair thinks that if it comes to a legal fight, BP would prevail.
The oil firm could also take more active steps to limit its liability, for instance through a selective bankruptcy of its US business.
But this would almost certainly be unpalatable to the company's board, as it would enrage US politicians, including President Barack Obama, and probably cut off the entire US market to BP.
So the political reality is that BP's liability in the Gulf of Mexico remains unlimited, and this continues to weigh down the company's share price.
Strategic investor or acquisition target?
In this context, speculation has arisen that BP may look to an outside investor to provide a capital injection to help cover these costs.
- Cost to date: $3.1bn approx
- Escrow account promise: $20bn
- Share price on 20 April (before leak began): 656p
- Share price lowest point (on 25 June): 296p (55% fall)
- 2009 profits: £10bn
- 2010 dividend: £1.8bn in Q1; Q2-4 cancelled, saving £5.4bn
- Total debts: £17bn, of which £4.9 due by end-2011
- 2009 cashflow: £21bn
- Credit ratings: A2/A (Moodys/S&P)
- Credit default swap spread (5 years): 4.1% per annum
- Market capitalisation: £65bn (at 345p current share price)
- Kuwait shareholding: 1.75%
- China shareholding: 1.1%
Data: Bloomberg as of 6 July 2010
Or alternatively it could fall victim to an unwanted suitor looking to buy up the company cheaply on the stock market.
Kuwait is high on the list. It has had a relationship with the company ever since the UK government sold British Petroleum on the stock exchange in 1987.
But Kuwait's involvement in that flotation serves as a useful case study in the politics of such investments.
The Kuwait Investment Authority helpfully bought almost 30% of the company after the sale was almost derailed by the stock market crash.
But the Arabs later came under pressure from Downing Street to give up hopes of a takeover and scale back their investment.
Yet today Kuwait may be the most attractive suitor.
On Monday, Libya voiced interest in making a grab for the company.
Resource-hungry China is also mentioned as a possibility. Its national oil company attempted to buy California's Unocal in 2005, only to be blocked by the White House on national security grounds.
Among fellow oil companies, the names of Exxon Mobil and Shell are also being bandied about.
But the resulting company might be unacceptably big and powerful for US and European anti-trust authorities.
"Even in Europe, the EU would have a fit about the anti-trust implications," says Mr Sinclair of Seymour Pierce.
Indeed, he thinks the entire idea of an investor buying BP itself is questionable.
"Why take on a company that is about to undertake several years of litigation... [with] unquantifiable potential civil penalties?" he asks.
Instead, he points to asset sales by BP as the likely way forwards.
BP could for example spin off US subsidiary Atlantic Richfield to one of its rivals.
Or it could sell individual wells and exploration rights to the Chinese.
This would minimise both political and anti-trust issues, and allow BP's existing management to keep control.
"BP can afford to fork out $4bn a year by selling assets... and being flexible about [capital expenditure]," notes Mr Sinclair.
Phoenix from the ashes?
The last possibility, and one that some market participants may be considering seriously again, is that BP will recover fully from its current debacle.
Having promised to set aside $20bn in a dedicated "escrow" account, some are hopeful there may be a tacit agreement with the White House that this figure will represent a cap on the company's liabilities.
Only time will tell.