BP's shares plunge on spill liability fears

NEW YORK/SAN FRANCISCO Thu Jun 10, 2010 4:54am IST

Oil from the Deepwater Horizon oil spill swirls in various colours in shallow water on East Grand Terre Island, Louisiana, June 8, 2010. REUTERS/Lee Celano

Oil from the Deepwater Horizon oil spill swirls in various colours in shallow water on East Grand Terre Island, Louisiana, June 8, 2010.

Credit: Reuters/Lee Celano

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NEW YORK/SAN FRANCISCO (Reuters) - BP Plc (BP.N) (BP.L) shares tumbled nearly 16 percent on U.S. exchanges to a 14-year low on Wednesday on rising fears about how the wounded company will cope with the massive costs of the Gulf of Mexico oil disaster.

The stock has now lost more than half its value since the April 20 explosion that sank a BP-contracted rig and led to the worst oil spill in U.S. history.

A steady flow of worsening news about the damage to the Gulf Coast environment and BP's reputation, along with the potential liability and political fallout, has cast doubt on the British company's ability to shoulder the burden.

The dramatic sell-off on Wednesday added grist to the mill for corporate restructuring experts wondering about BP's long-term viability, while other analysts pointed to an evaporation of investors' patience.

"The confidence in BP being able to stop the oil leak and deal with the ecological aftermath has disappeared," said Joe Kinahan, chief derivatives strategist at TD Ameritrade.

Concerns about BP having to halt its dividend contributed to the selling, and the U.S. Justice Department said late on Wednesday it was concerned about planned payouts from BP and Transocean Ltd RIGN.S, owner of the lost rig.

In the past two days alone, seven analysts have cut their expectations on the likely payout from BP.

BP believes it may be heading for a showdown with the U.S. government over ever-increasing demands to cover the costs of the spill, according to a company source.

"The United States' government is very mad at BP," said Jon Burnham, head of Burnham Securities, who sold his BP shares on Monday. "They are now in the position of appearing to buck the president, and I don't think the market likes that much."

BP's New York-traded shares headed sharply lower at about 1:30 p.m. EDT (1730 GMT), after an article appeared on Fortune magazine's website quoting high-profile oil analyst Matthew Simmons, who raised questions about the company's liability for the oil spill and its ability to survive the crisis.

BP's depositary shares closed at $29.20, down $5.46 on the New York Stock Exchange, the lowest closing level since August 14, 1996. Earlier, the company's stock fell 4 percent in London trading. For Graphic see link.reuters.com/wek29k

Phil Weiss, analyst with Argus Research in New York, said momentum was working against BP as news gets progressively worse despite the increased oil capture from the well, though he continues to believe the company will survive the crisis.

"I still feel like they can, but there's more doubt in my mind than there was a week ago," Weiss said. "Momentum is a powerful thing."

The company had said on a conference call with analysts on Friday that it has "plenty" of cash to deal with the problem, and the Obama administration has made similar comments as the company grapples with clean-up in the Gulf.

A BP spokesman said "nothing has changed" since Friday.

Restructuring experts agreed that by running the numbers alone, BP looked like it could handle the financial damage.

Brad Sandler, a bankruptcy attorney with Pachulski Stang Ziehl & Jones in Wilmington, Delaware, said the likelihood of a BP bankruptcy was "probably remote" because of its access to credit, solid cash flow and a healthy balance sheet.

BP reported about $27 billion of cash flow from operations in 2009 and total liabilities amounted to about 56 percent of total assets on its balance sheet of about $235 billion.

Stephen Lubben, a law professor at Seton Hall University School of Law in Newark, New Jersey, added that the potentially massive liability bill was not large relative to BP's size.

"You could add $50 billion of debt to their balance sheet and they would still be solvent, from an accounting perspective," he said.

But Lubben noted that situation could change depending on whether creditors and banks get nervous and cut off BP's access to funds, even if there was no sign of that now.

Investors who bet on such events are already eyeing that possibility. BP Plc's debt protection costs leaped 106 basis points on Wednesday to 368 basis points, or $368,000 per year to insure $10 million in debt for five years, according to Markit Intraday.

Option-implied volatility for BP hit an all-time high, as traders brace for the likelihood for more downside in the stock price in the months to come, said Jon Najarian, a founder of Web information site optionMonster.com in Chicago.

"It is not just a rumor about the potential of a dividend cut in BP anymore," Najarian said. "Now it's about the survivability of the company."

Other stocks associated with the Gulf spill were hit hard. Transocean (RIG.N) fell 8.1 percent to $42.58, having earlier traded at its lowest level in more than five years. Anadarko Petroleum Corp (APC.N), part owner of the blown-out well, lost 18.6 percent to $34.83 a share.

(Reporting by Doris Frankel in Chicago, Kristen Hays in Houston, Walden Siew, Ryan Vlastelica, Matt Daily and Michael Erman in New York and Tom Hals in Wilmington; Writing by David Gaffen and Braden Reddall; Editing by Steve Orlofsky)

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