BP has Managed to Fulfil it GoM Oil Spill Liabilities to Date

Tuesday 18 December 2012, Amsterdam

The explosion of BP’s Macondo exploration well in April 2010 led to a leakage of around 4.1 MMbbl (the volume according to BP) of crude oil into the GoM. Consequently, it faced several cases of litigation, a few of which are still under investigation. This oil spill posed concerns over the company’s operational integrity and BP incurred oil spill liabilities of around $37.2 bn, of which it paid nearly $30 bn as of Q2 2012. However, these estimates may vary in the future, subject to pending litigations. The hefty GoM oil spill liabilities raised questions over the company’s ability to bear the imposed charges burden without compromising the strength of its balance sheet. Although BP has paid the majority of these liabilities with its CFO so far; however, it fell short of cash to meet its capex requirements and other outflows. Therefore, the company was involved in asset divestments, debt raising and other ways to fulfill the cash needs and balance its liquidity position. The figure below shows BP’s GoM oil spill penalties payment schedule and its CFO during 2010–2012.

BP expects to clear the majority of its GoM oil spill liabilities by the end of 2012. This liability reduction program is backed by its strategy formulation starting from 2010. This strategy focused on sourcing the additional fund requirements through asset divestments, dividend reduction, capex reduction, debt issuance and equity offerings. These five ways helped the company to offset its liabilities as well as balance its liquidity. These additional cash flows provided the company with a liquidity cushion in a scenario when BP crucially needed huge cash to sustain its identity.

After the spill, the majority of the cash requirements have been met through the divestment proceeds generated to date. The company has announced strategic divestments of around $38 bn to be completed during 2010–2013, of which around $24 bn have been carried out as of Q2 2012. The table below provides the details of the company’s major divestments carried out during 2010– Q2 2012.

The majority of the company’s divestments were carried out in the US, which contributed more than 30% towards the divestment proceeds. One of BP’s major divestments from its portfolio was the sale of its upstream assets in the US, Canada and Egypt to Apache Corporation for $7 bn. As part of this transaction, the company’s divestments in the US included the sale of its Permian Basin assets, located in Texas and south east New Mexico, while in Canada, it divested all its upstream gas assets. Moreover, it also divested the Western Desert Business Concessions & East Badr El-din exploration assets in Egypt as a  part of this transaction. Apart from these, the company exited Colombia and sold several assets in Canada, Vietnam, Venezuela, the UK and other countries. These divestments along with drilling moratorium in GoM, led to a decline in the company’s production volumes, which decreased with a CAGR of -7.1% during 2009–2011. Consequently, the company’s cash flow generation capacity was affected. Thus, the divestment program affected the company’s performance operationally and financially. The figure below provides an overview of the company’s divestments during 2010–2012.

Thus, the GoM oil spill resulted in the thinning of BP’s liquidity cushion and made the company vulnerable to more leveraged capital structure. Consequently, the company’s risk appetite and its expansion capability have been affected. Although, it is attempting to come out of the shrinking liquidity scenario through several approaches such as divestment and others. These initiatives are expected to affect BP’s performance operationally and financially in the near-to-medium term. Thus, the company’s liquidity is expected to remain limited until GoM liabilities clear and its operations regain previous momentum. analysis expect BP’s operating cash flows and liquidity to gradually improve after 2012, when it will be free from the majority of the GoM oil spill liabilities.