Friday, July 30, 2010

How You Plug the Real BP Leak - The Vultures are Circling

A few weeks ago I wrote here in the Blog about BPs Other Big Leak. The implied question was when and how do you stop the flood of money leaking from BP coffers. Here is likely the beginning of the answer from American Marketing and Banking News:

“Exxon Mobil Corp (NYSE: XOM) and Royal Dutch Shell Plc (NYSE:RDS.A) may consider take-over bids for BP Plc (LON: BP) after the British oil company lost more than half of its market value as a result of the Gulf of Mexico oil spill, said JPMorgan’s Cazenove Ltd. BP’s market value has dropped by more than $100 billion since the April 20th explosion onboard the Deepwater Horizon drilling rig which killed 11 crew members resulting in an unprecedented oil spill in the Gulf of Mexico. BP has set aside $20 billion to pay claims related to the spill and said last week that the total cost of the spill had already reached $2.65 billion.”

A BP bankruptcy is out of the question it would send a shock wave thru the oil industry that would have investors running for the exits. Oil is a big buck business. The big players need access to the equity markets to keep drilling and they will not let BP take the industry down. Easiest way out, buy out BP or at least the North American assets, limit the total liability in the sale agreements. EXXON sure has plenty of experience in stringing these deals out over time. Look at Alaska.

How do you do a deal like that in the light of all the political pressure? Simple. Tell the Obama administration what the acceptable terms are, set absolute limits of exposure, and get their buy in on the deal. The leverage? The industry threatens to walk away, blame BP for the whole and then let BP fail. BP can drop maybe another 50 billion in market value but somewhere there is a point where even the vultures find the carcass distasteful. BP slides in to bankruptcy or worse just fails completely. Big oil cries a few heartfelt tears for their unfortunate BP brethren and you might actually see gas prices go down for a while to assure the public there is plenty of gas and heating oil for the upcoming winter. After a time various industry players through multiple holding companies gradually pick off what little meat is left on the BP bones and those with claims are left holding a very empty bag.

What about the politicians? The Jindals, Crists, Barbours and all of those fine local and state Representatives and Senators who were going to hang their political careers on BP bashing better take deep breath. If BP goes belly up and shuts down the clean up and the claims efforts who do you think the public and all of those out of work shrimpers and crabbers are going to turn on? You politicians who let this happen. The Obama administration could find themselves on the hook for the rest of the clean up. Another financial disaster for an already deeply stressed administration.

Sound far fetched? Look at the wars we have fought over oil. Think about how the US was maneuvered into some of these wars and conflicts. Big oil may be big but it is neither dumb nor cowardly. Oil is a tough business from the Mideast to Texas to Alaska to the North Sea these guys are survivors. They will do what ever is necessary to get thru this mess. Get in their way and you will be in big trouble.

The effort to plug the real BP leak has begun. Look for players from around the globe. The Mideast, South American, Russia and others. The states, and likely the Obama Administration, are way out gunned on this one. This problem will be resolved big oil’s way. If the current crowd of politicians doesn’t to play by big oils’ rules, big oil will elect a group who will.

Watch for a gradual backing away from BPs position “we will be here as long as it takes”. Not with BP market value falling like it has for the last few weeks. First early warning sign could be the disappearance of the fine gentlemen who volunteered for the BP claims management job. You know the one who was born in Louisiana. When you see the frequency of those commercials drop or the message change even slightly, watch out. My advice for those with claims; the old Chicago voting mantra. File early and often.

There is a bottom in the barrel. That bottom may well be defined by EXXON and Shell.

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