FT Alphaville has a very useful chart and related discussion based on Citigroup research, on the question of whether BP could segregate its operations as a precursor to some sort of “good company/bad company” restructuring. Such a move would no doubt be presented as a way to remove the cloud of uncertainty over BP, but the real motivation would presumably be to limit payout on claims related to its Gulf oil spill to assets in the US. (This is not an uncommon issue in litigation, BTW: the wronged party’s dealing are typically with a specific subsidiary. If that subsidiary does not have much in the way of cash in the till or assets, the plaintiff will need to establish that other entities in the corporate family with some ability are also liable).
Below is Citigroup’s chart of BP’s major legal entities, with the ones holding US assets in red (click to enlarge):
Now the wee problem here is that those red boxes also hold a lot of non US assets too. From the Citigroup report:
Based on discussions with our fixed income group and analysis of the various subsidiaries it appears that BP would likely struggle to ring fence the North American operations, given asset ownership and credit guarantees. In the absence of rejigging asset domicile many non-US assets could also be stranded in the US if the company attempted to ‘pull up the draw bridge’.
BP America Production Company appears to be the primary subsidiary involved in oil and gas production and transportation operations in the continental US, Gulf of Mexico and also other parts of the world. This entity also frequently signs and pays for leases in the onshore US based on US state production filings. The credit rating on this subsidiary appears to be tied to the parent BP PLC, which suggests the parent is a guarantor for BP America.
The US subsidiaries also appear to be the domicile for many of BP’s international assets in, for example, Latin America, Trinidad and Tobago and Angola. BP Energy Company, Amoco International Petroleum Company, BP Exploration & Production and Amoco Caspian Sea Petroleum Company are major subsidiaries within BP America that we estimate hold not only much of the US production base but other international operations including much of BP’s assets in South America.
Yves here. This is of course favorable to US parties seeking restitution against BP, not at all hot for its shareholders. I’m a little surprised to see this much mingling of projects. The few corporate general counsels I know are pretty attentive to trying to structure legal vehicles so as to limit exposures, but the business requirements of oil and gas exploration and development may make that difficult (but if not, it would serve as yet another illustration of how inattentive BP is to risk).
Now some readers have cheerily maintained that with $20 billion a year in income, the losses from the Gulf disaster will dent but not derail the company. I’m not certain how anyone can make that determination now. This spill is so far outside historical precedent as to make simple comparisons potentially misleading.
First, BP is being called on to segregate cash and the Administration is pushing for procedures to streamline payouts to those who have suffered losses. By contrast, in past oil spills, payments were not made until adjudication has run its course.
Second, BP is at risk of losing its US oil and gas leases and US government contracts. That would impair cash flow.
Third, there has been no mega oil spill in an area that is ecologically sensitive, has a very large tourist industry, a sizeable fishing industry, and high end residential property. I’m not sure anyone has a good bottoms up estimate of what the claims might total.
Fourth, most analysts are looking to the BP forecast that the leak is plugged by August. The Ixtoc leak, in much shallower water and also needed to use relief wells, took ten months to halt.
Fifth, it isn’t at all clear that the current 20,000 to 40,000 barrels a day estimate is correct. Rolling Stone, in a very well researched article, reported that the median of estimates among scientists was 55,000 barrels.
Sixth, in the past, oil companies could rely on courts to reduce damage claims, often by large amounts. And even though courts have become more and more conservative by design (read up on the law and economics movement if you doubt me), this is a very heated issue. The Supreme Court tends to be political, and any judge who is elected will also have to think twice in getting creative in his interpretation of the law so as to favor BP.
Having said all that, Obama has consistently taken a tough-sounding posture and then quietly dealt big companies a very favorable deal. So history would suggest that BP is indeed in no serious danger. However, this spill is so visible, and cynicism and anger are so high that his team may recognize that he risks not just his re-election, but the historical treatment of presidency if he does not extract reasonably full restitution for damages from BP. And as we indicated above, the tab could prove to be extremely large.