The Fourteenth Banker Blog

May 17, 2010

BP Should Suspend Dividend

Filed under: Running Commentary — thefourteenthbanker @ 12:32 AM

According to Yahoo Finance, BP’s shares outstanding times dividend per share would result in over $10 Billion in cash flow created by suspending its dividend.  A dividend suspension would provide credible evidence that the firm intends its shareholders to pay the damages associated with the massive oil leak.   With such a signal, Americans can be more confident that BPs siphon will be directed at the spewing well rather than at the coffers of local, state and federal governments to foot the cost of the cleanup, lost tax revenues, higher unemployment, social insurance and diminished economic activity.

As it stands today, the corporate double speak regarding such costs undermines BP’s credibility.  In its most recent comments, rather than affirming such an intent, BP simply references previous statements which are already in the public record.  I’m sure this is on the advice of lawyers telling the firm to “do no more harm, to your legal case that is”.

This counterintuitive step might also staunch the bleeding in the company’s stock price by making clear to investors that BP will fund costs, set up reserves for future costs, accept responsibility, abandon its past practices regarding cutting corners on safety, and retain cash for development of new reserves in a safe manner in the future.  Such a company might even be worth owning.

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9 Comments »

  1. Sounds like a good idea. I know the taxpayers aren’t looking forward to paying for this, either state or federal. It wouldn’t make whole the tourism and fishing industries that have and will continue to be negatively impacted, but it’s a start.

    We were told back in the Bush years that the cozy relationships between the oil industry and those supposedly overseeing the safety of same, was problematic, but, just like the “the market will regulate itself” mantra, we were lied to. Surpise, surprise!

    Comment by Sandi — May 17, 2010 @ 11:21 AM | Reply

  2. There are some massive conflicting problems involving BP’s predicament. Federal laws limit BP’s outside their own costs exposure to around $75 million. Surely there will be litigation. Both sides have all the money they need. Transocean has said they will raise the limitations on claims that have been in place since 1851. Transocean claims it has a hold harmless type insurance wrap contract against BP. This would be the expected insurance methodology in large scale construction. Halliburton most likely has an insurance wrap clause too and Cameron as well. All four players here have their own general liability insurances as well as coverages for loss of their own property.

    The officers and directors of BP would also have insulation of their operations through the use of separate joint ventures and subsidiaries. If BP has not been so careless as to allow piercing of the corporate veil, they can jettison the exploration units and put them into bankruptcy to protect themselves. The BP board is legally required to protect the interests of the BP shareholders. This legal requirement puts the directors and officers at risk if they do not tell everyone to buzz off and rely on the statutes and organized protections they have in place. Even if they lose.

    The really big questions here though would require some in depth research as to just how their insurances are structured. One mis-step and they have troubles. The claims protections given by Federal law will be the consequences to the government. These protections were legally put in place by the Federal government to encourage exploration . There is a crushing need for domestic energy . Needless to say, the protections were bought and paid for through influencing government.

    The losers here are almost surely everyone. BP might well just pull the plug on exploration in US waters. Other big players in American deep water exploration sold out their interests in the last year to concentrate in the vast US possibilities in tertiary recoveries, including residual oil zones, and in unconventional gas and tar sands. US deep water exploration is not worth the political risk until such time as US citizens beg on their knees to resume deep water exploration. That will be a very long time coming in view of the now known facts about North American recoverable tertiary and unconventional oils. The White House must have detailed understanding too that they can jettison deep water exploration.

    I am personally very interested in several basins amenable to future recoveries of even more than cumulative production to date. There are fields with 15-20% cumulative recoveries and recoverable percentages as high as 65% not counting residual oil zones. The DOE alone has massive amounts of data on this subject available on line. My on going studies concentrate on the fortuitous existence of sources of oil pool injectants in the United States that will enable these vast added recoveries.

    All in all, BP unless having done very dumb things might essentially just walk.
    In our system those in charge may pay heavy personal damages for ” doing the right thing”.

    Comment by Jerry J — May 17, 2010 @ 1:05 PM | Reply

    • Great comments and good fodder for the anti-corp crowd. I’m certain you will be proven correct. Still, it would be a real shift if they told the lawyers and shareholders to bugger off. There is plenty if value left for shareholders even if they do pay out $10 Billion.

      The system does not really promote honor does it?

      Comment by thefourteenthbanker — May 17, 2010 @ 3:18 PM | Reply

  3. My own summary of the situation personally is that there is no place for personal honor within a publically held corporation. You are a hired gunsel. I have, by choice, only worked for non publically held companies. Even there, you mostly check your personal honor at the door. Everyone must pick a balance that is personally acceptable .

    There is a macabre aspect to the entire political arrangement in the US. The corporation is a creature of the state. It behooves the corporation then to control the state. The more you diminish the state, the more the corporate aspect gains power from being the residual. If not, the complex society collapses.

    I glommed onto this problem in the late fifties in college . I worked for a mid sized public accounting firm as a junior while still doing college. Back then, the IRS provided summaries of the top 50 tax returns. The top fifty paid next to no income taxes which prompted the question … what about those with literally no income to report. The famous case was Mrs. Horace Dodge. I presented a paper on this in an advanced tax class and all the others in class had no real perspective that people did not pay income taxes unless they were utter fools. The greatest adaptive skill for immigrant types was knowing how things really work. I had very interesting teachers among family and friends.

    Going back to BP. BP was induced to bid for the block they drilled in by the government. They pay royalties to the government. They relied on the Oil Pollution Act of 1990. The state desperately and correctly understands survival depends on lowering reliance on imported oil or countering it’s deleterious effect on the economy as we live it AND how we invested in it on a tangible basis. We are stuck with energy needs because of our current reliance on middle distillates for essential uses. One way out is to substitute direct distillation of gas into middle distillates. There are both large scale and some ingenious small portable scale methodologies to directly reduce gas to distillates. This is why the big guys are buying out gas producers in the last year or two. This is why refiners are phasing down domestic refining in part. Paradoxically, from a military and geopolitical perspective, North American recoverable oil and gas require a high price to achieve a meaningful reduction in oil imports.

    The government has multiple antagonistic reasons that now politically prevent a balanced long term energy policy from emerging. A balanced long term energy policy will require that big finance be put down eventually even though big finance presently owns the state. The problem is being between a rock and a hard spot in multiple dimensions. After a lot of propaganda bunkum the deep water producers will walk. If the law is changed, the deep water producers will terminate exploration. For a time. The oil is still there. One of my little royalty trusts reports proven reserves of only 5.5 million bbl. In reality though, they have around 100 million bbl recoverable at $40-$60 bbl WTI prices. Very likely a lot more given detailed investigation of residual oil zones recoveries. The oil is there until circumstances require it’s production.

    The problem is so much more complex than the effects of an accident. Risk presupposes an unforseen consequence. At some point big finance gets in the way. At some point survival dictates they lose their power.

    Comment by Jerry J — May 17, 2010 @ 4:23 PM | Reply

    • What orderly way is there for big finance to lose its power?

      Comment by Sharma — May 17, 2010 @ 10:54 PM | Reply

  4. There is no orderly way to deprive the financial elites except by putting absolute voter fear into Congress. That may be underway. Vote against every incumbent in your party in the up coming primaries. Vote for a moron if you have to to make the point. The points should be obvious. First, under a very upsetting anti incumbency result in the primaries, all campaign contributions to incumbents lose their main value of keeping in place someone big finance owns. The incumbent may well transfer his campaign fund to the challenger but they must reacquire the allegiance of the winner under trying circumstances. A huge anti incumbency vote , across the board, in the primaries, guarantees a change that compels Obama to find ways , even concocted ways, to arrest and break the wealth of the finance elites. Deprive them of their jobs by backroom dirty methods.

    Failing that, the elites win until their utterly inherent destruction of the system occurs in the next big finance failure.

    The present oligarchic arrangement and interlocking with government is guaranteed to collapse the state along lines similar to the USSR in my view. The reason is that the oligarchs are incapable of ruling as an Establishment. The US has always been ruled by an oligarchy and when it failed we had a civil war. Loosely, the US oligarchies changed into establishment roles for much of our history. That, manifest destiny and cheap labor held it all together sufficiently to claim that there was an Establishment.

    Only a survival requirement will hold us together if present multiple failures persist. That will be plainly evident when it arises. Survival will require a dominating personality to rule and buy added existence. What better example than Octavian, the Tudor’s or more modernly FDR.

    Bluntly, the present financial elites require removal as a matter of survival for political elites. That conundrum is not too far off. Anti incumbency election results , or their failure, might well be the start of the required political conundrum.

    Most people do not understand that our entire political system is local/ state centered. Only two people are elected nationally. The heat of state financial failures with it’s attendant political nastiness will bring the issues to the forefront nationally. State pol’s have an ideal scapegoat. It all came from being ripped off by the financial elites. Wall Street is simply too easy a target when the survival of the state boil bursts. Col/ Prof Igor Panarin , a Russian geopolitical master thinks the issue will be decided in 2010 or at most in the ensuing couple of years.

    Politically, the key to getting rid of Wall Street is to use the state issues against them.

    Wall Street has committed suicide by delusion. I certainly do not have this down pat. Their are too many permutations. But it is obvious Wall Street could not survive the fall of the present political arrangement. Panarin does not have it down pat either. Look at the US situation as if it were an asymetrical war problem. Look at it from the point of view of Sun Tzu that the very best form of warfare is to defeat your enemy without battle. In short order, it can be seen that the main US weakness is incompetent economics combined with multiple national delusions.

    I think of Wall Street as enjoying it’s happy moment now as Nicholas II enjoyed the tricentennial of Romanov Rule in 1913 after weathering the defeats of the previous decade. Five years later Nicholas was dead in a cellar in Ekaterinburg. Wall Street, the financial system, is Nicholas II.

    Comment by Jerry J — May 18, 2010 @ 12:26 PM | Reply

  5. All you’d do is further damage the shares.

    Comment by Phil — May 23, 2010 @ 8:24 PM | Reply

    • I’m not sure I agree. The way BP is acting by not taking more responsibility will subject them to greater legislative risk. The US government is already reviewing blacklisting BP from certain future contracts. Suspending the dividend for one year would generate $10 billion in cash, which could be paid out in damages rather than to shareholders. Just like with banks, when the market feels you have accounted for your losses, it looks to normalized earnings/dividends for valuation. I’m quite sure BP is trading at a discount to NAV because their liability is uncertain. They could make it more certain by stepping up to the plate. They could also help resuscitate a badly damaged reputation. As for myself, I might start buying gas at a BP station again.

      Comment by thefourteenthbanker — May 23, 2010 @ 11:00 PM | Reply

  6. […] BP demonstrated admirable intent earlier in the process, such as around May 17 when the 14th Banker called for suspension of the dividend as a statement that the owners of BP […]

    Pingback by On the Curious and Misguided Defenses of BP « naked capitalism « The Fourteenth Banker Blog — June 19, 2010 @ 12:52 PM | Reply


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