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Friday, 25 June 2010

The BP Long Case - Hold the rotten tomatoes

Obviously there are few companies in the US less popular than BP right now. They may even have overtaken GS as the least well regarded big company there. Listening to the talk in the US media, and from US politicians, bankruptcy is on the cards, along with seizure of all assets and perhaps public lynchings for all senior executives.

Looking beyond the media storm though, BP is now dropping to a support level that has held for many years:

In the bankruptcy talk there also seems to be an assumption that BP is a single monolithic entity, which it isn't. The US operation owning the well is BP America Production, which is a fully owned and limited liability subsidiary of BP Company North America Inc, which is the same in turn to BP Corporation North America Inc, which is the same to BP America Inc, which is the same to BP Holdings North America Ltd, which is the same to the overall parent company BP Plc.

That is a lot of layers of limited liability, and while anti-Brit sentiment in the US, and therefore the US courts, is running high, the top two companies in the chain would fall under the jurisdiction of the British courts, where anti-Brit sentiment is at a low ebb.

Here's the BP corporate structure with the affected BP subsidiaries in red:

Looking around for info on the web, the view seems to be that the whole operation in the US has assets of $50bn, against BP assets of $160bn worldwide.

Estimates of potential liability are hard while the leak is ongoing, but the highest consensus view seems to be up to $50bn, for a company generating over $20bn a year worldwide. That liability may in any case be shared with other companies involved with the well, including Transocean, the rig owner, Halliburton, Mitsui and Anadarko, among others.

Liability on these offshore wells is capped in US law to $75m, not including class action and other lawsuits I think. US politicians are looking at changing that retrospectively, but these sorts of targeted retrospective law changes, while perfectly normal in (say) Russia or Venezuela, have been traditionally regarded with hostility by both US and international courts, and with good reason as they are a direct attack on the rule of law.

However BP has been offering to effectively ignore this cap, which may in any case be stripped away in the event that BP America Production is found guilty of gross negligence. If gross negligence is demonstrated (and that would be in a US court) then BP America Production and its subsidiaries may well be bankrupted and liquidated, but the question then becomes whether this would spread further up the line.

That seems unlikely, as unless it could be demonstrated that BP America Production and its parent companies were effectively being operated as one company, then the limited liability will stand legally, and any attempt to strip it away by legislators is much less likely to be supported in the courts than a retrospective change to the liability cap would be, as limited liability is a legal cornerstone of US capitalism  in a way that doesn't really allow for exceptions made at the whim of politicians.

All-in-all I don't believe BP US as a whole is going to go under, and if it does then bankruptcy in the US wouldn't seem to threaten more than 40% at most of BP's global assets in any case. BP's share price has fallen 50% since the leak started, so bankruptcy in the US looks more than priced in already.

I don't think that there's any realistic chance that BP worldwide could be liquidated as a result of this mess, and any attempt to do so by US legislators would be unlikely to achieve anything more than irritate the British government, whose people are already doubtful about the UK's very close alignment with the US in recent years, and not at all impressed about Obama's habitually anti-Brit attitude in any case.

Support for BP at $27 may not hold, but at the least BP looks an interesting speculative long there as it is the key major support level for BP in the last fifteen years.

I thought that these articles were interesting, among others:


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