Wednesday, June 16, 2010

Fitch Group's Error Take 2

Yesterday it was reported at The Markets Are Open on the great mistake by Fitch Group. Fitch Group is one of the big three credit rating agencies on Wall Street along with Standard and Poors and Moody's. Yesterday, Fitch cut BP's credit rating 6 notches from AA to BBB. A kind of cut that is unheard of. Today, it was reported BP will withhold their declared dividend payment. As well as cut capital expenditures (Cap Ex) by essentially the exact amount speculated here yesterday of around 4 billion over 2 years. BP also plans to sell 10 billion of Assets.

BP is only committed to put 5 billion in the government escrow account this year and only is required to put 1.25 billion in the fund per quarter until the account reaches 20 billion. Theoretically this means it can take until 2015 before BP has paid the 20 billion in this account.

It is likely with rising oil prices that BP's Net Income will be between 80-100 billion or even higher from now until 2015. BP may thus be able to survive the disaster without a huge hit to their equity and may continue to be able to grow their business during this time. The government has structured the payout very favorably towards as it has allowed BP a slower then nature of making payments. BP is able to pay the money over time and not in an all for one hit which could have been more devastating.

It is likely the government will be paying for almost all of the current costs of the cleanup and BP will pay them back over time. This allows BP a lot of time to generate the cash flow required. It is important to realize that the current developments do not cap BP's liability, but today can give us a clear glimpse in how easy it is for a cash cow like BP to pay 20 billion dollars.


We again contacted CEO of Fitch Stephen W. Joynt of Fitch Group. He has yet to respond.

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