Friday, June 18, 2010

BP's Fateful Discovery: Bottomless Liability

3 & 18 June 2010

How does BP stay in business here? I'm honestly not sure why anyone is buying the stock these days, even with the company's market capitalization slashed by $70 billion or so (it has bounced back up from $36 to $39 the past two days).

The problem is liability. The greatest Gulf of Mexico oil spill in history has created unending damages to wildlife, ecosystems and countless human activities - with human health, fisheries, leisure travel, waterfront real estate (and property values) impacted, presumably for many years to come.

No corporation (or mega-corporation), BP included, could possibly ever muster the funds to reimburse all affected for the damages unleashed by this disaster. Apparently 1/6 of all British dividend payments originate from BP. I don't see how that lasts either.

I haven't seen much discussion of this issue. There was talk on CBC radio today about the immense value of BP's assets - but that calculation disregards the company's liabilities. We saw
Johns Manville plunge into bankruptcy over asbestos insulation claims.

BP in the gulf is bigger than that - far bigger by at least an order of magnitude. Once again - the US taxpayer will foot the bill, and I predict that many of the damages will never be paid (think about Florida Gulf Coast real estate values, just for a starter).

Once again, we are facing a paradigm shift, and the market hasn't caught up with the concept of "bottomless liability." Take my word for it, this case is not over until BP is in bankruptcy court. No corporation on earth could bear liability on this scale.

Click here for one forum that is discussing this somewhat complex issue. For example, BP's total liabilities may be limited by law, at a small fraction of the total damages.... As to insurance coverage - they insure themselves through a sub-venture known as "Jupiter."

18 June 2010: For more on oil spill clean-up, ask Cecil, at "The Straight Dope." The good news - oil is biodegradable, and natural bacteria are probably more effective - and certainly safer - than chemical dispersants. The bad news - in low oxygen areas, not much degradation can occur.

Re today's news. Will a $20 billion fund cover "bottomless liability?" I wish, but I don't think so.... As of today, $20 billion is 20% of BP's total market capitalization of $99.28 billion. I think BP can be restructured, but I still see this one going to bankruptcy court.... Very bad news for British investors - to run into the full force gale of US tort - and possibly criminal - law! How can any company survive the unstinting assaults of the combined US political and legal systems?

Interestingly, Douglas McIntyre proposes that BP made a mistake to cave-in on the $20 billion fund. Read about it here.

The New York Times thinks that BP may be facing a total bill on the order of $56 billion, but that BP can generate enough cash to pay the cost, assuming all goes well. I see two problems with this analysis: (1) bottomless liability will continue swelling the amount to be paid, and (2) it is seldom
that everything goes well for anyone in the real world which all of us inhabit. Read the NYT article here.


After Hours: 31.62 Down 0.09 (0.28%) 7:59PM EDT

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BP plc (BP)


  1. The whole issue that well spewing out oil makes me sick!

  2. If you were there in the Gulf (I'm going to Sarasota in February next year), you would be PHYSICALLY sick! There isn't anything BP is NOT liable for, unless they can find an umbrella of legislative protection! Accidents happen, but the mounting evidence of carelessness and incompetence will win the company little public sympathy. Yet BP is Britain's lifeblood. This will really hurt British investors, as the company is widely held on its home turf.

  3. is it bad that this 'i told ya so' moment makes me so happy.. im sure this could have been avoided if it werent for that pesky profit-at-any-cost-by-any-means motive.. i, too, am a capitalist but cmon.. when is enough truly enough?

  4. This is becoming a US versus Britain issue. The Brits are very concerned that the Americans are eviscerating their premier company. I agree that BP's irresponsibility and incompetence seem to have done them in. But mark my words, this case will cause international businesses to think twice about US-based capital investment. I can foresee the US getting the cold shoulder from former international suitors for many years to come.