A Way To Turn BP Around

June 9th, 2010 by hackel Leave a reply »

Sell 1 billion shares at $30 per share and agree to eliminate the dividend for 3 years.

Currently, BP pays about $10 bil. a year in common dividends, so that after 3 years, if the company’s normalized free cash flows continue at the past three year rate, and the $30 bil. is dispersed, their book value will not have declined, as BP managers will be working all discretionary expenditures to generate cash.

They will then have $60 bil.+ ( with interest) to pay claims, which would be more than sufficient as cases drag through the courts and perhaps funds could be set up to pay effected parties. More than likely, given BP’s current balance sheet, they would have closer to $ 68 bil. without impairing its current financial structure.

As much as BP is making horrific headlines now, in three years, it will be a bad memory for most-the world will have gone through many crises by then.

If the price of crude rises, BP’s cash flows will be much stronger- as much as a combined $ 100 bil in operating cash flows and $40 bil. in free cash flow, with the added free cash available to pay claims, making for a total $75 bil.+ without severely impacting current financial structure.

With $75 bil.+,  BP would approach and put together various insurance syndicates with the huge pool in guaranteed funds to take over the liability.

Given the cost of the Exxon Valdex cleanup was $ 2.1 bil., with another $1 bil or so (after insurance) to settle claims, it is doubtful BP cannot satisfy claims from its financial flexibility.

After a couple of years, as it becomes apparant BP will work itself out of the disaster, and as management begins to “mop up” the additional shares from free cash flow, its stock should be at a level seen early this year. If the price of crude were to rise above  $ 95 bbl, the share price of BP could be expected to rise substantially.

As for the immediate issuance of equity, would BP be able to float the issue? Given its trading volume is averaging 300 mil shares a week on the NYSE alone, a deal that size would seem quite do-able.

The company’s first step, is to hit the equity markets for the raise. After the deal is placed, there is a good chance for a rebound in the shares.


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