BP Needs to Cap Its Financial Gusher, Too

BP (BP) has managed to cap its runaway well in the Gulf of Mexico, yet it still faces cleanup costs, damages, and fines that could climb up to $50 billion, according to Oppenheimer (OPY) analyst Fadel Gheit. Now there's a new challenge: That kind of financial hit, on top of a $30 billion-plus overall debt load, could drive up the British oil company's borrowing and oil trading costs, and squeeze profitability in the quarters ahead.

BP Chairman Carl-Henric Svanberg told analysts on a July 27 earnings call that the company's "liquidity is strong," even as the British oil company posted a $17.15 billion second-quarter loss from a $32.2 billion pretax charge to cover spill-related cleanup costs and potential fines. In its earnings release, BP also outlined possible financial risks that "may put pressure on the group's liquidity," though BP Chief Financial Officer Byron Grote described such risks as "minuscule" in a call with analysts.

Energy traders may demand more collateral from BP because of "ongoing contingencies" and recent or further downgrades in its credit rating, the company said. BP also disclosed that it might pay more for its $17 billion in bank credit lines or be "unable to make a drawdown" if lenders decide the company will struggle to repay the loans because of pending or threatened legal or administrative proceedings.

"I would guess that BP is definitely on the watch list at many banks and counterparties," said analyst Charles Ortel, a managing director at investment research firm Newport Value Partners, in an e-mail. "They will likely grow to fear the many uncertainties created by the Obama Administration's approach and penalize BP, which would accentuate BP's potential funding crisis."

In its earnings release, BP said it took a pass on "some of the financing options that were available on more acceptable terms in the past." BP spokesman Andrew Gowers said in a phone interview that "there were difficult moments in the credit markets, but the effects of the Gulf crisis on trading were marginal." In gas marketing and trading, BP took a second-quarter loss that cost the company more than $500 million, though the reason wasn't disclosed in the results announcement. Gowers said the loss in gas marketing and trading so far was largely a result of "market conditions" and unrelated to the spill.

To strengthen its finances, BP added $12 billion worth of bank credit lines in the second quarter and cut its dividend. It also launched $30 billion in asset sales to raise cash, seeking some payments up front. Apache (APA) agreed to pay $5 billion in cash by July 30, out of the $7 billion it will part with for oil and gas fields in Texas, New Mexico, western Canada, and Egypt. Colombia's Ecopetrol and Canada's Talisman Energy will pay $1.9 billion, mostly up front, for BP's Colombian oil and gas and production businesses.

With proceeds from the sales, BP said it may halve its $23.2 billion in net debt (overall debt less cash and other assets) during the next 18 months. "It's likely that the rush to sell assets stems partially from the desire to reduce debt that will be more expensive to sustain or refinance and to accumulate cash to deal with damage claims, thereby extending BP's runway before it may have to contend with an inability to pay claims timely," says New York restructuring lawyer Martin Bienenstock of Dewey & LeBoeuf. "You can bet all their pre-spill lenders are working overtime making lists of legal outs of their duties to fund new draw requests."

The bottom line: BP may have to pay more to borrow and finance oil trading operations from its oil spill-related cleanup costs and fines.

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