Just when BP (BP) thought it was safe to go back in the water, it's become more dangerous than ever.
The Justice Department is charging the company with gross negligence for its actions related to the 2010 Deepwater Horizon oil spill in the Gulf of Mexico, mincing no words in the process. In a memo accompanying the filing, government lawyers said the company had a "culture of corporate recklessness," which led to actions that "would not be tolerated in a middling size company manufacturing dry goods for sale in a suburban mall."
If the charge can be made to stick, BP could face fines up to $21 billion, as specified in the Clean Water Act. Can the company survive such a financial -- and public relations -- nightmare?
Contrast With the Exxon Valdez
On April 20, 2010, a blowout in the Macondo oil well in the Gulf of Mexico led to an explosion on the Deepwater Horizon drilling rig. The explosion itself, which ultimately sent the rig plunging to the bottom of the Gulf, killed 11 workers. As the giant oil-drilling platform plummeted down, it crumpled, wrecked, and finally tore apart the nearly mile-long network of pipes that kept the well's surging oil safely contained.
As a result, the well then began to pump oil unrestrained into the Gulf of Mexico, approximately 170 million gallons' worth, oiling 650 miles of coastline and making it the worst spill in U.S. history.
Up until then, the Exxon (XOM) Valdez oil spill had been the country's worst. On March 24, 1989, the company-operated supertanker ran aground in Prince William Sound in Alaska, spilling more than 250,000 gallons of oil. Exxon, now ExxonMobil, ultimately spent more than $4.3 billion in fines, cleanup payments, and settlements.
Brother, Can You Spare $13.8 Billion?
BP has already spent $14 billion on activities responding to the spill. And the $21 billion in fines the company is now facing doesn't include punitive and compensatory damages, which the company is trying to cap at $7.8 billion. Can the oil giant even begin to absorb all of this and stay solvent?
A quick look at the company's balance sheet says no -- at least not out of cash savings. As of the most recent quarter, BP has about $15 billion in cash: enough to suck up the $7.8 billion in damage claims, which would leave it $13.8 billion short if the full $21 billion in fines is levied.
If need be, could the company borrow its way out of this potential fiscal calamity? BP already carries $48 billion in debt, but is a cash generator, with operating cash flow of more than $19 billion in the last year alone. Chances are, then, it could raise the money either in the corporate bond markets or from the banks.
Buckle Up, BP
Shares in BP initially fell 3% on the news of the Department of Justice's official filing, bad news for both investors and the company. But luckily for BP, interest rates are at historic lows, so if the energy giant does need to finance its way out of this mess, the debt repayments shouldn't be crushing. Another silver lining for BP is that so far, at least, no criminal charges have been filed: That would be a whole other kind of mess.
There's also a reasonable chance that, in the end, BP won't have to pony up the entire $21 billion, either because of an out-of-court settlement with the federal government or through a doggedly fought courtroom battle -- most likely the former. We've all seen enough situations in which a defendant facing a potentially crushing maximum sentence gets off with much less.
Regardless, it would do the executives at BP well to remember that, while ExxonMobil did recover from the Valdez oil spill in Alaska from both a financial and public relations standpoint, it took years. So BP had better buckle up. It's going to be a long, bumpy ride.
John Grgurich is a regular contributor to The Motley Fool. The Motley Fool owns shares of ExxonMobil.
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