BP Plc may saddle potential buyers of its assets with lawsuits as Europe’s second-biggest oil company tries to raise money to pay claims that may reach $100 billion from the Gulf of Mexico spill, lawyers said.
Apache Corp. may agree to pay $10 billion to $11 billion in cash next week for some of BP’s Alaskan assets, according to people familiar with the deal. Exxon Mobil Corp., Royal Dutch Shell Plc and Tullow Oil Plc have also said they may be interested in buying some of BP’s properties.
Laws prohibiting fraudulent transfers could allow victims to sue a buyer to recover money deemed essential to pay claims, and successor liability could leave a purchaser with BP’s obligations, if BP files for bankruptcy. A proposed change to federal bankruptcy laws could force a buyer to wait for BP to get approval from victims for the sale, or persuade a judge it will have enough assets to pay claims in full.
“Any purchaser will worry about fraudulent transfer and successor liability issues, and perhaps request part of the purchase price be kept in escrow for such a contingency,”,” said New York bankruptcy lawyer Martin Bienenstock of Dewey & LeBoeuf LLP in an e-mail.
BP said today it found no sign of an oil leak after stopping the flow from its broken Macondo well yesterday for the first time since an April 20 explosion at the Deepwater Horizon drilling rig killed 11 workers. The well had dumped as much as 60,000 barrels of oil a day into the Gulf, according to a U.S. government-led panel of scientists.
London-based BP rose 5.40 pence, or 1.34 percent, to 407.15 pence in London trading today. Apache fell $2.50, or 2.9 percent, to $83.63, as of noon in composite trading on the New York Stock Exchange.
Last month BP agreed to deposit $20 billion in an independent account to pay compensation to victims. BP said it would sell $10 billion in assets to pay for damage from the disaster, which has already cost the company more than $3.5 billion.
Louisiana Treasurer John Kennedy has said the total cost of the oil spill may be as high as $100 billion. Oppenheimer & Co. analyst Fadel Gheit last month put the financial damage from the environmental catastrophe as high as $60 billion.
While BP could survive a $60 billion liability, “I am less certain they can survive $100 billion or more,” Gheit said in a phone interview.
BP generated $30 billion in cash flow in the last four quarters and had $5 billion in available cash, another $5 billion in credit lines and $5 billion in standby loans as of June 4, said spokesman Toby Odone. BP has said it won’t file for bankruptcy.
Odone declined to comment on whether potential asset buyers or lenders had raised the issue of fraudulent transfer law or proposed U.S. legislation on asset transfer.
Apache declined to comment through spokesman Robert Dye. Alan Jeffers, an Exxon spokesman, wouldn’t comment on BP. “Any asset purchase agreement has lots of complications that need to be evaluated,” he said. Wendel Broere, a Shell spokesman, declined to comment.
Under current law, if BP were to declare bankruptcy, the company could try to sell assets free and clear of liabilities through a so-called 363 sale, as General Motors Co. and Chrysler Group LLC did last year.
“If I were Exxon or Shell, I would try to buy BP’s assets out of bankruptcy,” said Nancy Rapoport, a bankruptcy law professor at the University of Nevada, Las Vegas. “You get clean title.”
If the proposed change in the law, which has passed the House, is enacted, a bankrupt BP couldn’t do a 363 sale. It would instead have to get approval for the sale from spill victims holding two-thirds of unpaid claims, or prove to a judge it would have enough assets left to pay claims in full.
Credit-default swaps traders last month were pricing in more than 40 percent odds that BP would default within the next five years, according to data provider CMA.
The contracts, which rise as investor confidence deteriorates and fall as it improves, have dropped the past two weeks, falling 234 basis points since June 29 to 360 basis points yesterday, CMA prices show. That implies the market has priced in a 26 percent probability of default, assuming bondholders would recover 40 percent of their investment.
“Other than bankruptcy, which BP will try to avoid like the plague, there is no vehicle that will enable BP to clear the decks and eliminate the cloud of liability hanging over it for many years to come,” said Bienenstock, who advised GM on its bankruptcy.
Even 363 sales can be challenged. Defunct Lehman Brothers Holdings Inc. and its creditors are trying to recover an alleged $11 billion “windfall” from Barclays Plc, which bought Lehman’s brokerage in 2008. Barclays has denied wrongdoing.
“The buyer of BP assets will require a discount because of the uncertainty,” said John Tucker, a lawyer with Rhodes Hieronymus Jones Tucker & Gable in Tulsa. “They have to make certain they’re paying a justifiable price” or else a bankruptcy court could reverse the deal in the future. Tucker’s clients include Thomas Kivisto, former chairman of bankrupt SemGroup LP.
The risk of lawsuits is lower if BP hires investment bankers to run a bidding process, recording bid prices that showed the buyer paid a market-tested value for the asset, said Bienenstock.
“Arm’s-length commercial deals are rarely set aside as fraudulent transfers,” he said. “Courts don’t like to second guess arm’s-length negotiations.”
Apache might hire an independent appraiser to write an opinion letter saying either that the price was reasonable, or that BP was solvent, said Stephen Lubben, a bankruptcy law professor at Seton Hall University School of Law in Newark, New Jersey. Apache’s purchase if completed will include half of BP’s stake in Alaska’s Prudhoe Bay oil field, the people familiar with the deal said.
“Either defeats an element of a fraudulent transfer action,” Lubben said. “Somebody could always challenge the opinion letter, but it makes it much more costly for the plaintiffs.”
Under some state laws, an oil spill victim could sue to undo a BP sale that closed four years earlier, said Lynn Lopucki, a law professor at the University of California, Los Angeles. New York State law goes back six years, Lubben said.
BP sold $289 million of assets to Magellan Midstream Partners LP in a deal that the companies began negotiating in February. The sale includes oil storage tanks in Cushing, Oklahoma, and pipelines that connect refineries in southern Texas, including BP’s plant in Texas City.
BP also sold its interest in Kazakhstan’s Tengiz oilfield and the Caspian Pipeline Consortium to Moscow-based OAO Lukoil for $1.6 billion in cash in December. Lukoil, which bought Getty Petroleum Marketing Inc. in 2000, owns a network of U.S. filling stations with Houston-based ConocoPhillips.
BP needn’t be insolvent or in bankruptcy for a plaintiff to sue a buyer of its properties under state law, Lopucki said.
“Tort victims could sue because the assets remaining to pay them have been reduced” by the sale,” he said. “They might argue the $20 billion fund is not enough.”
Even a foreign buyer of BP assets outside of the U.S. might not be able to avoid U.S. law, Lopucki said. “As long as the foreign buyer has assets in the U.S., U.S. courts would have jurisdiction,” he said.
BP’s Odone said the company will wait until its next set of results to decide whether to borrow more money to pay its spill bills. BP is due to report quarterly results on July 27.
BP faces more than 300 lawsuits filed by fishermen, property owners, restaurant operators, environmentalists, local governments and its own employees. Most of the lawsuits have been filed as class actions in federal courts in the five states along the Gulf coast, Louisiana, Alabama, Texas, Mississippi and Florida.