Stock talk for the main street investor.

What Will Happen To BP?

As BP tries to stop oil from gushing into the Gulf of Mexico I was asked recently if this will lead to bankruptcy for BP. It’s certainly possible and would be unprecidented to take down an institution so large and seemingly stable. So lets look at some back of the napkin numbers…

BP had $16 billion in cash at the end of last year. That should be the first thing chewed up by cleanup and lawsuits. Last year they generated another $16 billion in free cash flow, most of which was returned to shareholders. Say they spend $4 billion in cleanup (recent estimates are they’ve already spent $1 billion) they would have ~$28 billion by the end of the year to pay liabilities.

Consider less liquid assets they have like other drilling rigs, Castrol, land, etc and you would have to see $60 billion or more in lawsuits for BP to go under. They’ll be able to delay some of their payments in court so the cash thrown off by the business can be used for payments in the future. Certainly not an enviable position but I just can’t see them bankrupt right now.

It’s too bad that’s the case. Causing a disaster like this should leave BP on the ocean floor next to the oil rig that blew up.

Disclosure: I have no position in BP.

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