Can British Petroleum (BP) Go Bankrupt?

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.

The Costs

So far, the BP clean up costs are estimated to be around $15 billion, with an additional $20 billion fund setup for litigation coverage.

The Financials

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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FT

FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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Matthew
10 years ago

Free Cash Flow is Much Better Shown by = CFO-Cap ex.

Just using Amoirtization is a cop-out as adding it back does not approximate cash earnings well at all.

Brendan
10 years ago

Dividend cut is enough for me to pass. Once the dividend has grown for a few years i will have another look.

Jesper Jensen
10 years ago

I hope that BP will clean up all the problems and they won´t go bankrupt.

Neil
10 years ago

I suspect that BP will try and limit its annual exposure to damages by holding up some of the large claims. I can imagine that some kind of bottleneck will develop even without company interference.

I had the money to gamble I would got for it!

Rocky
10 years ago

I have looked and I have purchased. I personally feel that BP throws off to much free cash to get put under by this. I think that once the well gets capped and people forget and turn to other things, that BP’s stock will increase and they will reinstate there dividend. I bought about 3 weeks ago and watched the price drop about 5 bucks per share. But I still personally think that this is going to be a good investment for the long haul.

Also, I read that with the $20 Billion dollar escrow fund that BP does not have to fund that all at once. I believe they said that they would be able to fund it over three years or so.

Rocky

Multiple Egg Baskets
10 years ago

The other factor that is in BP’s favour is simply the supply and demand of their services. Could their be a citizen focused demand that ends up indirectly impacting BP’s bottom line? Will the American political and economic machine use this as an attempt to gain greater influence with another firm. We know that the US has a vested interest in BP so maybe this is their chance to negotiate.

….after the G20 weekend and the conspiracy theories about the police being the Black Bloc your mind starts to wander.

Mike
10 years ago

If you think about all the possible liabilities arising from this disaster it is scary:
direct cleanup costs, costs due to lost income (fisheries, processing plants, tourism), lawsuits over reduced coastal property values, lawsuits from state and local governments for lost revenues due to the above, lawsuits for health problems from workers involved in the cleanup, etc..

Months after this disaster started there are still up to 100,000 barrels of oil per day gushing out of the well. This could devastate entire industries for years. BP has estimated that they are spending $100 million per day in direct cost and damage claims!!

Personally, I would touch BP until more clarity exists on potential costs and liabilities.

Ms Save Money
10 years ago

I honestly don’t even think they’ll go bankrupt with this oil leakage. They’ve made so much money that this probably wouldn’t kill them. It’d certainly hurt their funds but not enough to go bankrupt.