BP Money by the Bucket–Heath Suddleson Guest Post
Heath Suddleson always has useful commentary and today is no exception. Some original thinking is sure to be included when Heath does a guest post—- Buck
Beware the Buckets of BP Money
President Obama and British Petroleum (BP) have agreed to set aside $20 Billion in an escrow account administered by Kenneth Feinberg. Does his name sound familiar? It should, he is the Executive Pay Czar from the TARP Program.
Wait, shouldn’t this be a good thing? BP has set aside funds to deal with the fallout from this spill. Now we don’t have to worry about people being compensated for damages or the cost of clean up. That all sounds good in theory, but let me tell you why this is a disaster in the making with far more impact than the spill itself.
1. The funds are administered by the Government and not BP. This means there is no incentive to keep compensation payouts reasonable. After all, wouldn’t you award someone a huge payout if you didn’t have to foot the bill? Would you be so generous with your own money? Of course not, you would make fair settlement offers because if you don’t they will take you to court where the jury may not be so sympathetic to your case. Still, you would make a fair offer that tries to keep the overall impact down.
2. The funds take away from BP’s capital at a time where they need all available cash to contain the damage and clean up the oil. Imagine trying to do some home improvements while someone else is taking away your readily available cash.
3. The funds take away from BP’s ability to honor its current contractual agreements. Down stream suppliers and even stock holders whose dividends are in jeopardy rely on that income for their own needs. Don’t forget that BP share holders include a lot of retirement mutual funds that are supposed to produce income for the retirees. In fact, 1055 institutions hold BP stock as compared to 0% insiders and 5% owners. That means that the stock holders of BP stock are NOT the corporate executives of BP. BP’s stock has already dropped 50% since the spill and to deny the dividend as requested by Obama is adding insult to injury for all of those who hold this in their pension plans.
4. The agreement shows a commitment on the part of the Obama Administration to make BP pay damages as a higher priority to stopping the oil from gushing into the gulf. I work for an international company and our attitude when disaster strikes is, “deal with the issue now and the impact later”. This approach both keeps the focus on the more critical task of rectifying the situation and limits the impact for all concerned. In the 20 minutes that Obama met with BP execs, the focus was on paying and not dealing with the underlying problem.
5. The best thing for America right now is a healthy BP who will still be around to provide jobs and pay damages. This bucket of money sets the stage for the Obama Administration to try and put BP out of business. How long can you milk a cow that is alive and healthy? How long can you milk that cow once you have sent it to the butcher? Even the meat will soon disappear. The right approach is to keep BP around to provide more over the longer period of time.
I do find it ironic that the Obama Administration went to such great lengths to save General Motors at taxpayer expense, but they are already carving the headstone for BP with this agreement. The argument at the time the GM deal was struck was that we needed to save the jobs. Well, BP employs a lot of Americans, too. Are we not worried about those jobs?
Apparently, Obama is more worried about looking good for the downtrodden rather than being a true leader and dealing with the crisis at hand. Rather than looking at long term solutions, he is looking at short term band aids.
I will leave you with this final observation. A friend of mine posted this message on her Facebook account, “I love Barack Obama. He talks about the future and the courage of the American People to face it. I have no use for politicians who are always talking about the past.” The ironic thing about her post is that he and his administration have been blaming the Bush Administration for setting this up to fail (talking about the past) and they are only talking about the future without dealing with the now.
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Comments
Ouch! I am not a fan of fresh water fish at any price.
I trust your financial analysis of BP condition. As to the damage to the wetlands and fish stock I’ll wait for the marine biologists to ply their trade.
I believe the chemicals used to disperse the oil are the greater danger than the oil.
The Obama Administration and BP seem to be an example of dumb and dumber in the attempt to stop the flow.
Fran,
First of all, I never said that BP should not be held accountable. I never said that BP acted responsibly. They should be held accountable, and the jury is still out as to what happended and what should have happened. I work in the construction industry where accidents happen all the time. There is no automatic rule that says who was at fault. That can’t be determined until proper investigations are done. Those investigations should be AFTER the catastrophe has ended. Public opinion and congressional lambasting are not proper investigations. At the end of this, there will be plenty of blame to go around and plenty of pockets to dip into.
As for the suspension of dividends, those were based on the previous quarter’s profits and the stock had already gone ex-dividend. I have held many stocks waiting for them to “go ex” to get the dividend and then dump them if I was not happy with them. The Obama Administration requiring these dividends to be pulled are a RETROACTIVE PAYCUT to RETIREES. I don’t care how diversified a portfolio is, you can’t properly manage the fund when the rules change retroactively.
Reports today are that damage is at $2 Billion and counting. More focus is being spent on recovering damage than stopping damage. Kenneth Feinberg yesterday said, BP had been doing good job of paying out emergency claims had had already paid out over 2500 checks totalling $63 Million against only $600 Million in claims. Still, the administration felt it more important to take over the claims process than to fix the ongoing problem.
Again, priority #1 must be stopping the damage that is still happening. Any other focus is counter-productive and makes the overall impact worse.
It’s good policy and good economics for BP to be held accountable for itself and it’s operations.
BP has been arrogant and taken undue risks leading to a castatrophic disaster in the Gulf of Mexico. The initial loss of 11 workers has been followed by the destruction of wildlife and habitat. Ultimately every living being on the planet will face toxicity from chemicals which BP has exposed us to either in the cleanup or from the spill.
The damage is incalculable. It’s well past time that we demand accountability fro those corporations in a position to influence our environment.
It’s common practice in the securites industry for a fund to meet specific diversification requirements. Not every investment works out and that is expected. It always works that way. Good surprises, bad surprises. Statistically safe. One broken egg in the basket doesn’t make that much difference. That is how portfolios are constructed. For that matter, we have Wall Street now offers “socially responsible investing” for those who choose not to invest and support companies like British Pete.
Finally, BP generates huge amounts of net free cash flow. That means at the end of the day they have incremental more huge amounts of money .
BP’s dividend is 51% of per share earnings of $6.57 leaving fully half of their huge annual earnings available for investment for capital ependitures , investments in plant and equipment, debt service etc.
In other words BP is something of a cash cow.
Nobody is going to miss a meal because of the stock price or dividend cut except maybe Tony Hayward. They might, however, stop eating sea food for the next couple of centuries, unless of course, there’s another spill down the road. Or pay $150 per pound for freshwater fish.