BP Sells the Future to Fund Reparations

Back in June I suggested that BP could fund the (likely low ball) estimate of $20B to clean up its mess in the Gulf of Mexico and make reparations to those affected without unduly harming its future prospects. It appears that as the potential cost to BP will likely run higher, the ability to finance this out of dividend suspension, borrowing and operating profits -- which I addressed in my earlier post -- will prove insufficient.

BP has been selling assets, supposedly non-strategic assets, to raise additional funds. While they do their best to downplay the impact of those asset sales, that they are sacrificing future revenue potential, is unconvincing. The very fact that they've raised by billions that they have demonstrates the risk-adjusted future value of those petroleum-producing fields. Further, the sales that are being announced now must have been in negotiation for many weeks, perhaps going as far back as May. While the purchasers of those assets already have a stake or an very likely had an expressed interest in them, the negotiations and legalities had to take many weeks. We can conclude from this that BP believed early on that the costs of cleanup and reparations would be well above early estimates. They knew that they had to sacrifice at least part of the company's future prospects.

“I am delighted with the price we achieved for these assets,” BP Chief Executive Officer Tony Hayward, who steps down on Oct. 1, said in the statement. “It now makes sense for these assets to go to owners more willing than BP to invest in their future development.”

More likely what Hayward means is more able, not "more willing than BP to invest in their future development.” Regardless, even so this seems enough, for now, to provide some relief to shareholders, as evidenced in the strong reversal of the stock's free fall.

Probably BP's only true defense at this point against unlimited liability that would bankrupt the company is political: the US government is bound to take steps at some point to limit BP's liability, or make it easier for BP to spread the liability to others such as Transocean and Anadarko, so that British pension funds and shareholders are protected, which will be the cost of remaining on good terms with a key ally. That cost may ultimately fall of those most affected, the residents of the Gulf coast whose livelihoods have been impacted.