With total assets over $235 billion and liabilities around $134 billion, BP’s balance sheet looks clean. BP generated a net income of $20 billion from $265 billion revenue. To put it in perspective, BP’s revenue was bigger than the GDP of Finland and roughly equals the GDP of South Africa. It looks even better considering the fact BP has $7 billion in cash. BP’s strong financials with good dividend payment exceeding $2.5 billion every quarter will make any stock holder smile.
Then the explosion and the infamous Deepwater Horizon oil spill. BP had a heart attack.
On April 20th, BP’s stock (NYSE: BP) closed at $60.48. Two months later on June 18th, the closing price was $31.76 the lowest since 1998. The market value of BP dropped by over $90 billion. American people have learned from the past Exxon Valdez oil spill off the coast of Alaska. Exxon promised that it would pay for clean up and damage claims, but subsequently fought a 15-year legal battle going all the way to Supreme Court and got the punitive damages reduced from $5 billion to a paltry $500 million. This time around, President Obama foresaw this and did something unprecedented in history by asking BP to set aside $20 billion for cleanup efforts and damage compensation.
Now the $7 billion cash looks measly. It is true that BP is generating plenty of cash and it can figure out a way to set the escrow amount. Investors who were happy with the dividends are now anxious. BP’s trading volume has increased a whopping 20 times from a mere 5 million shares a day. Stock value going down in high volume trading clearly indicates that investors are nervous. But the worst is yet to come.
BP’s credit rating has already been downgraded. It seems that the $20 billion set aside isn’t enough to cover all the liabilities. Cleanup efforts haven’t picked up momentum yet. The bills haven’t started coming yet. The leak is still unplugged. Two relief wells are still under the process. BP’s credibility is in the dumps.
Will BP recover from the heart attack? No one knows what the total cost of cleanup, damage compensation and the time required to fix the leak will be. Bankruptcy is a real possibility but don’t feel bad for BP. BP is not going away. Shell and Exxon are waiting to pick up what will be left of BP. Their lawyers are probably working on this already.