We believe the most critical issue for investors in BP will be the company's longer-term environmental cleanup costs and exposure to US regulatory fines, legal penalties, and potential operating constraints. In recognition of growing potential liabilities, we recently lowered our fair value estimate, and now we are raising our fair value uncertainty rating to very high from high. In our view, BP's ability to fund near-term costs related to the oil spill is less of a concern, given the firm's current cash resources and debt borrowing capacity. A decision to defer or cut the dividend or pay it in script also could help to free up cash for near-term oil spill costs.
Our central concern is the growing uncertainty about BP's exposure to costly penalties and operating constraints that are likely to take years to resolve. Environmental cleanup costs and restitution for lost Gulf Coast business could grow to $10 billion or more. Civil penalties will probably take years to determine via the US court system and could reach $4,300 per barrel of oil spilled. Government estimates of oil spilled increased again to 20,000-40,000 barrels per day from earlier estimates of 12,000-19,000 b/d. Assuming 40,000 b/d of oil flowing into the Gulf for 120 days, potential civil penalties add $21 billion or more, with BP's 65% share equal to $13 billion. Furthermore, we are increasingly concerned that BP could be vulnerable to paying more than its 65% share of oil recovery costs, should it be determined that BP demonstrated gross negligence.
Beyond these costs, the outcomes of civil lawsuits and criminal investigations launched in the United States are likely to increase BP's ultimate liability significantly. Another key consideration for investors is the potential loss of future business in the US. We can envision a political outcome that bars BP from future participation in Gulf of Mexico projects, and while we think it is unlikely, it is conceivable that the US could deny BP access to federal lands (and waters) or require asset sales of US-based businesses. It will probably take years for BP to restore its reputation, making it more difficult to secure approval for new business ventures or requiring additional funds or assurances to operate. We think BP would be less likely to take an operator role in major projects in the near term. These risks have not yet been fully factored into our fair value estimate.
Catharina Milostan is an equity analyst with Morningstar.
