Thursday, June 17, 2010 10:06 PM EDT
By Hao Li
Credit analysts see the negotiated $20 billion escrow fund as a positive outcome for BP because it reduced a significant amount of uncertainty and stretched the payments over 3.5 years.
The terms include $20 billion set aside in an escrow fund to pay for damages and $100 million in a separate fund to help oil workers who lost their jobs. In addition, BP has agreed cancel dividends for the rest of 2010.
For the $20 billion fund, BP will pay $3 billion in the third quarter of this year, $2 billion in the fourth quarter, and then $1.25 billion per quarter until the full amount is exhausted. Meanwhile, before the fund reaches $20 billion, BP will set aside U.S. assets to “assure” payments.
However, $20 billion is not the cap for liabilities and it does not include fines and penalties.
Brian Gibbons, senior oil & gas analyst at CreditSights, an independent credit research firm, said the $20 billion escrow fund – which was not overly punitive – removed a large degree of regulatory uncertainty by providing an established dollar amount and time line.
"The fear was that the government was going to do something so drastic as to effectively push the company into bankruptcy," said Gibbons.
Philip Adams, senior investment grade analyst at Gimme Credit, another independent credit research firm, wrote that from the dividend cut, planned asset sales, and capital expenditure reduction, BP will have saved $16 to $18 billion in cash in the next 12 months, versus the scheduled $7.5 billion payment to the escrow fund for that period.
Adams concluded that BP's financial strength – namely the ability to generate over $30 billion in operating cash flow annually – gives it “a great deal of resilience in dealing with the ultimate liability.”
In addition, Gibbons observed that the escrow fund allows the Obama Administration to appease public anger and ease their intense pressure on BP.
“Now they can come out of the meeting and say they have held BP accountable and hold up a $20 billion escrow account,” explained Gibbons.
Gibbons believes that in all likelihood, the $20 billion amount will account for a “substantial portion” of the ultimate liability, even though it excludes penalties and fines. He points out that many claimants would prefer to go through the fund to collect rather than file a lawsuit that can drag on for many years.
And in all likelihood, BP will not have to pay astronomical amounts from lawsuits outside of the escrow account for years to come – if at all – because such lawsuits take a long time to resolve.
However, the negotiated outcome has negatives as well. The New York Times cited an analyst who estimated that total legal costs, including criminal fines, to be $63 billion. The same article cited a professor who stated that criminal indictments alone could cause BP to lose lucrative government contracts.
Matti Teittinen, senior equity analyst at IHS Herold, an independent energy research firm, pointed out that the increased asset sales and reduced capital expenditure will hamper long-term growth and put BP at a disadvantage compared to competitors.
Teittinen concluded that potentially hefty civil and criminal penalties create too much uncertainty for him to consider BP's stock “attractive” at this point.