As the Estimated Size of the Spill Doubles to 40,000 Barrels a Day, BP (NYSE: BP) Looks Insolvent

Other artlcles that I have read on BestCashCow.com have suggested that the size of the Gulf spill is not too big for BP to handle and that the Democrats should lay off and let the company continue to pay its dividend. I wholly disagree.

As pundits analyze BP’s future, many proponents of BP’s stock continue to point to a $75 million limit on compensation for economic damages written into law after Exxon Valdez. Those focused on this clause will be sorely disappointed. First, these limits are vitiated by negligence, willful misconduct or criminal conduct. Even if BP were found not to have committed negligence, statements and representations of senior management will probably be deemed to have waived the $75 million limit. Many have suggested that BP’s liability to third parties and to the government could easily wind up in excess of $15 billion.

Most importantly, a completely separate clause buried deep in the U.S. Clean Water Act exposes BP to civil fines on an absolute liability. The fines aren't limited to any finite cap and expose BP to $4300 for each barrel of oil that spills into U.S. navigable waters.

According to the government’s latest estimates released today, 40,000 barrels of oil a day spilling directly into the Gulf, more than twice the high end of previous estimates. Hence, BP’s absolute liability is now $172 million a day, or at day 53 total over $9 billion. With a relief well unlikely to be completed before August and with BP capturing well under half of the leaking oil, thdese civil fines are certain to double.

Adding liability back, BP is now looking at no less than $35 to $40 billion in fines.

Now, let’s bring Exxon Valdez back. That spill was only 257,000 barrels and would end up costing Exxon $7 billion. Based on the Valdez oil volume to cost and liability relationship, the BP spill at 40,000 barrels a day will easily wind up costing BP just under $1 billion a day.

When you look at BP’s balance sheet, it simply does not have access to the billions that it is going to need to cover its fines and liabilities. Hence, the reality is that the dividend needs to be cut immediately and BP is going to need to quickly dispose of its assets to cover liabilities. If the company survives, it will be a much smaller, less valuable company than the $100 billion which the market continues to value it at.