With all the news these days about the oil spill, one has to wonder if BP will find a way out of the hole that they dug themselves into. It’ s difficult to estimate what the total cost of the spill will turn out as no one really knows how bad it will be when it’s all said and done. However, we can take initial estimates reported by the news.
Who is British Petroleum?
BP is one of the big 6 supermajor oil companies with international operations. With almost $240 billion in revenue in 2009, they are among the largest energy companies in the world. Trading under symbol BP on the NYSE, they have quickly dropped from $60 to around $30 (June 22, 2010) with a current price earnings ratio (P/E) of 4.67.
If you watch the news at all, BP is well known for being responsible for the oil spill disaster in the Gulf of Mexico.
So far, the BP clean up costs are estimated to be around $15 billion, with an additional $20 billion fund setup for litigation coverage.
Although the costs may seem ominous, it’s all relative. BP is a huge multi national oil company who make revenues that most of us cannot even comprehend. The question is whether or not BP can survive this oil spill and it’s associated costs.
I’m not a stock analyst, but I understand the basics of financial statements. Taking a peek into BP’s statements, here is what is disclosed regarding cash available to support this disaster.
Dividends per year
BP was a regular dividend paying company up until this year where they received a lot of pressure to eliminate the dividend to help cover oil spill costs. According to their financial statements, BP distributes about $10.5 billion a year in dividends. $2.6 B has already been distributed in 2010, but the dividend cut for the rest of the year will result in $7.9B cash savings.
Cash on Hand
This one is pretty easy to pick out of the balance sheets. As of March 31, 2010, BP has about $12.2B in readily accessible cash.
Free Cash Flow
This one is a bit trickier but I typically calculate this one myself. I use a similar formula that is used to calculate adjusted funds from operations when evaluating REITs. Basically Free Cash Flow or Owners earnings as Warren Buffet puts it is calculated:
Free Cash Flow = Net Income + Amorization/Depreciation – Capital Expenditures
The above information used for the calculation can be plucked straight from the cash flow statement.
- 2009 (Dec 31 year end): $17.2 B
- 2008: $23 B
- 2007: $24.7 B
As you can probably guess, oil prices have a large effect on the free cash flow of BP. As 2010 oil prices have been relatively high, it is probably save to assume that BP will bring in at least $17B. Of course, this is before any oil spill clean up costs are accounted for.
Putting it All Together
So the question remains, can BP go bankrupt trying to clean up the worst environmental disaster in U.S history? It looks as though 2010 free cash flow will be more than enough to cover estimated clean up expenses of $15B. To pay for the $20B fund demanded by the U.S government to cover litigation costs, cash on hand plus the dividend cut should be enough as well. If more cash is required, BP has the option of issuing more long term debt/bonds, another equity/share offering, or even selling some of their $240B worth of assets.
Although earnings may be very low over the next year (or more), it appears as though BP has enough resources to stay afloat.
Back to you, from a purely financial perspective, would you invest in BP?
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