Or, Credit Suisse soothes the knife-catchers.
It’s safe to say that BP hasn’t exactly outperformed since its July Q2 results release, ouster of a failing chief executive, and progress on capping the Gulf well:
Which, for Credit Suisse’s analysts, has merely opened another good entry point for BP investors, compared to stronger long-term upside potential in the company. As they noted on Thursday (emphasis and link ours):
In truth, very little has changed in BP’s fundamental investment case since its 2Q results on July 27th. We see the recent news flow on potential legal bills as largely noise that add no clarity on the ultimate amount of liabilities. We have not changed our estimates of total costs including clean-up and liabilities of $46bn post-tax ($57bn pretax), which assume gross negligence, 100% of costs borne by BP and a 50% probability of punitive damages…
To summarise, our $46bn post-tax cost estimate includes pretax clean-up costs of $11.2bn, Clean Water act fines of $16.2bn (assuming gross negligence), economic damages of $18.4bn and punitive damages of $9.2bn (using a 50% probability).
Gross negligence is the ‘key swing factor’ for Credit Suisse, as it affects the division of costs between BP and its partners in the well, plus the total sum of fines brought under the Clean Water Act – not to mention the bank’s own valuation target of 600p, which would work out closer to 515p if negligence is proven.
So with the final word on gross negligence probably not due until the middle of next year, that suggests knife-catcher anxiety could last quite a while yet — or at least on this issue.
For a start, Credit Suisse reckons BP’s funding environment has improved much more than its equity in the last month. As it observes:
If anything, BP’s balance sheet appears to be in better shape than it was a month ago—BP has sold a further $1.9bn of assets in Colombia at a reasonable price, and is well on track with its divestment target of $25-30bn by end-2011. Including the $7bn Apache deal, this brings the total to $8.9bn of assets already divested, leaving another $16-21bn of further potential divestments.
In addition, BP has taken steps to secure $5bn of new bank loans backed by oil sales from Angola and ACG (Azerbaijan).
In our view, BP may well stop short of its divestment target of $25-30bn if debt markets normalise or if it manages to secure more bank loans backed by cash flows. Further assets likely to be sold include Pakistan, Vietnam, North Sea, US onshore gas and Pan-American (Argentina).
So if BP realises $30bn of proceeds from asset sales in the next 18 months, that should add to $23bn of free cash flow to cover both $33bn of Macondo costs and paying out $10.5bn of 2011 dividends. It still involves a relatively tight year in 2011, though, with BP facing a $21bn deficit — if $25bn or so of costs from the spill land next year, including the assumption that BP does face gross negligence claims under the Clean Water Act.
Still, not quite the vortex of fear that used to face BP in the credit market. BP should be better-positioned come 2012 and 2013, Credit Suisse adds:
By 2012 we see a $6bn deficit, which should be covered by bank lines. By 2013, BP should be back to positive surplus free cash flow. We note that we slowly raise capex again in order to drive production growth from the lower base and take into account potentially higher offshore drilling and regulatory costs.
Gearing: We see gearing (net debt to cap employed) rising from c.16% at end 2010 to 28% at end 2012 before falling in 2013, excluding further divestments. Such levels of gearing are manageable in our view.
Which is much better news — but we’ve been unsure in the past about the health of the ‘normal’ long-term investment case for BP, after the sales of assets to finance its post-Macondo recovery.
Credit Suisse provide some reasons to be upbeat here (emphasis theirs):
After the announced divestments, we forecast production of 3,865kbd in 2010 (-3.3% y/y) and 3,989kbd in 2015. Effectively, BP should be able to grow from a lower base – our numbers imply 0.6%p.a. growth from 2010 to 2015, and flat production from a 2009 base. Our 2015 production estimate is c.200kbd below BP’s pre-Macondo March target of 4.15-4.2mbd. We have assumed a one-year delay in all GoM new start-ups, which should affect 2014-15 rather than the near term.
After 2015, including sanctioned and pre-FID projects, we estimate that BP will be able to maintain volumes flat for one to two years before entering more severe declines of 3-5%p.a in 2018-2020. This should not come as a surprise, since BP’s more conventional profile has always meant lower production visibility relative to some peers—e.g., Shell and Total.
And of course, visibility on future long-term production prospects isn’t necessarily the most important factor for catching the knife right now.
It wouldn’t hurt, though.
Related links:
BP oil spill – FT / In depth
Beware possibilities – FT Alphaville