The costs to BP vs Anadarko

BP’s costs from the spill so far are $1.25bn, excluding another $360m towards building Louisiana barrier islands.  The problem is, as the company itself continues to point out, the total liabilities are difficult to know. A few weeks ago several equities analysts had estimated ranges of low-single digit billions to a maximum of $US12bn for BP. But bigger estimates have come out more recently as the oil slick spreads; BP’s own house broker UBS is now estimating a $40bn gross cost and others, a $20bn net cost.

And this uncertainty is affecting other companies involved in the Macondo well. The much smaller oil and gas company Anadarko is a 25 per cent owner of the well, with a non-operating interest. There are questions of how the liabilities will ultimately be split once investigations into the cause of the accident are completed, and of how the political and regulatory fallout might affect Anadarko. The risk of costs has alarmed investors, who have punished the company’s stock price even more than BP’s in recent weeks, as the chart shows. Anadarko’s relatively small size (it booked $9bn in revenues in 2009, against BP’s $239bn) makes it look vulnerable against a full quarter of the costs of the disaster.

Meanwhile, Moody’s over the weekend revised the outlook on Anadarko’s credit rating to negative, although it hasn’t changed the rating itself, as has already happened to BP which has seen a downgrade from both Moody’s and Fitch. But BP, with its much bigger market capitalisation, more diversified operations and relatively low debt levels, is still thought to have no problem raising more debt. This goes some way to explaining how the company has continued to make confident signals (though not promises) that its dividend will be maintained.

Another big concern is Anadarko’s exposure to Gulf of Mexico deepwater drilling – it describes itself as the largest deepwater independent operator  in the area, with 11 production platforms and more than 30 field discoveries. Most of these are at depths of between 3,000 and 5,500 feet of water, with one at 8,000 feet.  Almost 26 per cent of its oil and gas produced in the first quarter of 2010 came from the Gulf of Mexico.

As with BP, some analysts are saying the Anadarko sell-off is bigger than warranted. The moratorium affects drilling of new wells but not existing producing platforms, and the company isn’t exclusively focused on Gulf of Mexico – it is also active in several other big hydrocarbon plays, notably the Brazilian pre-salt, Ghana’s big ‘Jubilee’ offshore field, and US shale gas. Bloomberg reported last week that the company was able to cancel three of its GoM deepwater rig leases, by invoking force majeure clauses.

However, it doesn’t necessarily matter whether the estimates are correct or not. As FT columnist Tony Jackson writes today, professional investors who believe BP is oversold can’t necessarily act on that:

Investors cannot buy BP on that basis, any more than they could buy absurdly cheap prime mortgage-backed securities in the credit bust.

Then, as now, we heard talk of “catching a falling knife”. A thing may be cheap, but if it is going to get cheaper fund managers cannot afford to buy it.

I suspect that in a few years’ time, BP at this price will seem a huge missed opportunity. But the way the industry is structured, that is neither here nor there.

Related links:

BP investor call: What are the prospects for the dividend? FT Energy Source

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