Executives of BP PLC and other firms involved in deepwater drilling in the US Gulf of Mexico were bracing June 15 for President Barack Obama's televised Oval Office speech that evening on US energy and the Macondo blowout.
In his fourth Gulf Coast visit June 14-15 to show his concern about the blowout that has disrupted other political goals, Obama threatened to take over BP's processing of claims from coastal residents unless the company establishes an independent entity for that purpose. Also, White House lawyers were investigating the president's authority to legally prevent BP from paying a dividend to shareholders—"an issue that is further complicated by BP's status as a foreign company," said analysts in the Houston office of Raymond James & Associates Inc.
But Obama also faced some tough challenges in his speech. He had to satisfy critics he had finally ceased control of the problem and live up to earlier tough talk of kicking posteriors. Yet he couldn't afford to boot BP so hard as to bankrupt the company, leaving it unable to pay damages and cleanup costs. BP reported costs incurred from the spill totaled $1.6 billion, at a rate of $40 million/day over the 2 weeks ended June 14.
Obama, Cameron talk
In a June 12 "warm and constructive" telephone conversation with Britain's new Prime Minister David Cameron, Obama said he had no interest in damaging BP's market cap or overall viability. Millions of British retirees hold BP stock, including many who were employed by BP's government-owned predecessor. The company's stock is said to have lost 40% of its value since the blowout. However, many financial analysts still recommend it as a "buy" at bargain prices, assuming the company will survive and prosper.
Even before Obama's speech, however, Fitch Ratings downgraded BP's debt rating "by a whopping six notches" to BBB following a previous reduction to AA, "leaving it just barely in investment-grade territory," Raymond James analysts reported. "All three major rating agencies [Fitch, Moody's Investors Service, Standard & Poor's Corp.] had already cut BP by one notch earlier this month, but Fitch is the first with such a dramatic cut. In its downgrade, Fitch cited the risk of BP being forced to place huge sums ($20 billion is the initial demand from a group of Senate Democrats) into an escrow account, which would necessitate significant borrowing. BP's credit default swaps are currently trading [at] a level consistent with junk bonds."
BP directors met June 14 to consider potential options, including suspending dividend payment for two quarters, issuing new shares as dividend, or escrowing the amount while covering the mounting cleanup expenses. Obama was to meet June 16 with BP executives for the first time since the blowout. On June 17, BP officials were to testify in hearings by the Senate Energy and Commerce Committee.
Meanwhile, analysts at Pritchard Capital Partners LLC said, "All parties are throwing BP under the bus [by depicting it] as a poor operator that took shortcuts that caused the catastrophe while everyone tried to stop them; this will allow the administration to gracefully exit the moratorium with stricter regulations and not cripple the Gulf Coast economy more than the spill did."
Anuj Sharma, research analyst at Pritchard Capital Partners in Houston, said, "The government could disbar BP from previous lease sales, although this has never been done (North Carolina and Florida leases have been pulled but only due to the states' decision to ban drilling). Unfortunately, politics of the event are still whirling around, not a lot of clarity yet, even from a group that is very tied in to the lobbying efforts in the capital."
Industry observers expect the liability cap under the Oil Pollution Act of 1990 to be raised from $75 million to possibly as high as $10-20 billion. "The number seems high [and] would materially impact smaller gulf deepwater companies, essentially limiting the market to the national oil companies and majors," Sharma said. Drillers and operators are uncertain about new safety standards "as certification requirements have unknowns," particularly in regards to blowout preventer certification, he said.
In other action, a federal judge denied Transocean Ltd.'s request to limit its liability for damages caused by the Macondo spill to the value of the rig's unpaid drilling rental fees, about $27 million, under the Limit of Liability Act of 1851. The company's stock price dropped as the judge ruled Transocean can be sued under the Clean Water Act and others.
(Online June 14, 2010; author's e-mail: [email protected])
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