We have built three scenarios with varying assumptions about the flow rate and capture rate of the containment ships to arrive at the amount of oil that will be released till August 1, 2010 (scheduled date for completion of relief wells). Please note that the flow rate and capture rate assumptions are on the basis of the latest reported figures by government scientists and BP (who has a perverse incentive and conflicted interests). The actual flow rate and the capture rate are still uncertain. The average cleaning costs per barrel and the litigation and punitive damages estimates are based on analyst estimates.

The total estimated spill cost is $40.5 billion, $73.9 billion and $107.2 billion under optimistic, base and adverse case, respectively. The amount of losses already discounted in the prices is nearly $67.9 billion (not taking into consideration the very recent pop in the stock price) which is the difference between the current market cap and the market cap based on fair value per share using peer average 2011e P/E multiple.

We modeled the estimated spill costs in the projected cash flow position of BP over the next four years and it is observed that although the spill costs will result in excessive liquidity pressures in 2010 forcing BP to cut down on dividend and capex and raising fresh debt, the possibility of bankruptcy will arise only if BP is not provided the required funds. It should also be noted that it is our understanding that bankruptcy will probably not expunge BP’s liabilities in regards to cleaning and rehabilitating the environment damaged by the spill. Based on the cash flow projections in which we have assumed cancellation of dividend in 2010 and cut down of capex by 50%, the total free cash flows in 2010 under Base case and Adverse case are -$40.4 billion and -$70.9 billion. Apart from any new debt requirements, BP also will need funds to refinance its maturing debt of nearly $1.3 billion and $6.0 billion in 2010 and 2011, respectively. BP has credit facilities of nearly $5 billion.

Thus, the survival of BP will primarily depend on availability of funds from the market (and barring a significant blowup stemming from the expanding Sovereign Debt Crisis) and the uncertainty around the spill costs will make the funding difficult.

Financial Analysis