Several conclusions follow from this chart (data from the Financial Times.)
The first is that BP is simply a gigantic cash machine, like the other “oil majors.” It can fund its massive capital expenditures from its own cash flow without recourse to the bond market even while paying huge dividends to shareholders. No hint of economic crisis here.
BP’s financial position will improve significantly next year. Presumably, oil fields recently developed are ready to come on line as global oil prices remain firm or rise on Asian demand.
BP can handle even large payments into a federal damage fund so long as future liability is capped.
Shares in BP tumbled more than 9 per cent on Monday as US Democratic senators called on the multinational oil company to inject $20bn immediately into a ring-fenced fund to clean up the Gulf of Mexico spill.
This would equal two years of dividend payments and still leave all of the lovely “free cash flow after dividends” in 2011 and 2012.
The critical issue is not the dollar figure — $10 billion? $20? $30? — but whether it caps BP’s liability for all damages arising from the spill. After all, limiting liability is the very essence of corporate management.
The ultimate size of the spill — which is still ongoing — is unknown. The economic and environmental damages are widespread, long term and very difficult to quantify at this time. Without that liability cap, BP’s financial future is cloudy indeed and its stock price is unlikely to recover. (It’s down fifty percent since the spill.) In the words of the Washington Post:
Don’t get us wrong — BP must pay cleanup costs, compensation and damages, which are likely to be considerable. But Mr. Obama’s fund also should not become the means to accomplish the politically attractive end of forcing BP to pay in a manner that unnecessarily overstresses the company. Indeed, victims of the spill should hope that BP flourishes — so that it has the profits from which to pay them in the years ahead.
The irony here is that the victims of the current spill will have a financial interest in BP’s continued development of risky deepwater oil resources. The same is true of the rest of us who will suffer individual losses or pay through our taxes for whatever BP does not — or cannot — cover.
Here is President Obama’s balancing act. On the one hand, BP may fall into crisis if its liability for damages is not somehow limited and made predictable — the swift and cruel judgement of the financial markets. On the other hand, if BP’s liability cap is set too low, then we taxpayers will be on the hook for ballooning damage costs in the future. President Obama does not want to let the company collapse nor does he want to let BP off too easily and face the wrath of the voters.
Unfortunately, we humans have demonstrated poor decision-making skills when it comes to managing unpredictable future costs. Behavioral economists have suggested that we are prone to hyperbolic discounting whereby costs and benefits in the medium and long term are discounted more heavily than those in the short term. Hyperbolic discounting explains the warped thinking of addicts who focus on their immediate need for the substance in question — nicotine? heroin? petroleum? — while ignoring or downplaying the future consequences.
Hyberbolic discounting affects the decision making of investors, voters, consumers and politicians alike. We want our gasoline, 401k growth, fresh oysters and clean beaches and we want them now. Those who aspire to be leaders must show us a path out of this trap that does not condemn our children and grandchildren to greater burdens.