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Saturday, February 4, 2023

Maritime Logistics Professional

Too Big to Fail: Part Deux

Posted to Global Maritime Analysis with Joseph Keefe (by on June 17, 2010

After losing control of the blowout and spill, BP has also lost control of the PR message. With only one thing left to lose, what comes next might turn into the real disaster for the U.S. Gulf Coast, the oil industry and the energy models that fuel the American economy.

About six weeks ago, I asked, “Is BP too big to fail?” I also questioned the viability of any firm – no matter how big – that instantaneously loses 20 percent of its stock price while at the same time trying to fight a live oil spill and clean up the growing mess that it has caused. A lesser company might be looking for ways to fold its tents in the face of all that, but BP soldiers on with its unpleasant task. At mid-week, BP even had enough cash reserves to buy 32 of Hollywood actor Kevin Costner’s oil vacuum gizmos. And yet, today’s offshore situation in the Gulf is at least twice as grave as originally reported. Failing a quick fix that does not appear to be coming, today’s problems will seem trivial in comparison to what is about to come. And, I am not just talking about tar balls on the beach.
By close of business on Friday, the value of BP stock and associated market cap had dipped, more than once, to as little as one half of its 52-week high. In stark contrast, at this point in the 1989 EXXON VALDEZ crisis, that oil major’s stock price had rebounded nicely and although still being painted as a villain in the media, EXXON had weathered the worst of the storm, stopped the spill and they were well underway with the cleanup. On day 52 of the BP Spill Crisis, even political cartoonist Gary Trudeau had turned his sights on BP and begun lampooning their failed PR effort in his Doonsbury comic strip. Trudeau is a lot of things, but he is rarely off the mark with what is important. His humorous efforts to paint the BP spin machine as a collection of empty rhetoric has hit home hard, especially given the grossly inaccurate estimates of spilled oil and lack of transparency from the oil major.
Notwithstanding the pathetic state of my own stock portfolio in this latest downward trend in the broad markets, I also find myself rooting for BP to succeed. You should be doing the same thing. From the financially unwashed standpoint of having witnessed firsthand (as spouse of a banking executive) what can happen to a too-big-to-fail top five bank from my own living room, let me explain what might transpire next: A continued downward spiral in BP’s stock value – not necessarily an unrealistic scenario given today’s news – will eventually trigger a shortage of cash to do business. I don’t care how much cash and “proven” reserves that they are currently sitting on. Credit will tighten considerably and then dry up completely. No one wants to throw good money after bad. The potential end result for BP, looking at what happened to some of this nation’s biggest banking conglomerates in the past two years, is not hard to imagine.
BP has bigger things to worry about than suspending its second quarter dividend in order to calm political criticism in the U.S. As a minimum, that money is better spent fighting the blowout and associated spill. To be sure, the gesture will go a long way towards creating some much needed good will. Taking the long view in the face of the crisis that to this day defies an accurate estimate of present and future damages, the suspension of a few quarterly dividends may well be an integral part of the firm’s ultimate survival. And, as the U.S. Coast Guard issues stark orders to BP to position additional containment equipment to combat the growing spill, the cost estimate of $20 billion given by experts for the disaster just weeks ago will probably be eclipsed many times over before it is all said and done.
Through it all, BP executives and public relations people have failed to contain the ongoing story, partly due to underestimated spill volumes, arguably poor transparency, and a claims process that is falling short for many folks. Last week, BP executives foolishly continued to argue – and in a very public forum – over the seriousness of the underwater oil plumes. On the other side of the ledger, critics from both the left and right have assailed the Obama administration for not doing enough in the wake of the disaster. If BP is unable to make it financially through this unprecedented mess, those critics may soon get their wish. Obama will have to do plenty.

My general sense today is that most financial pundits still think that BP is “too-big-too-fail.” I hope that they are right. From my viewpoint, though, BP today more closely resembles a failed U.S.-megabank than perhaps its oil major cousin, EXXON. And, if BP doesn’t very soon get firm control of the situation, it will be the taxpayers once again who will be footing the final bill.
The loss of the deepwater rig “Horizon” and the aftermath spawned by the spill and cleanup effort has already proven to be a game changer here in America. Offshore operating rules are sure to be radically changed and the six-month moratorium on new drilling and exploration is affecting employment in the oil patch and on the Gulf Coast. Heads are already starting to roll and we haven’t even begun to see the political fallout which will almost certainly permeate our society for decades to come. My money is on BP to survive and eventually conquer this entire mess. And, in case you didn’t already know it, so is yours.