BP (NYSE:BP) — Is BP Too Big to Fail?

London-based BP (NYSE:BP), is the world’s third largest public oil and gas company. However, positioned at the heart of the oil leak in the Gulf of Mexico, and with a weakening market cap now around $130 billion, the question must be asked… is BP too big to fail?

To answer the question we turn to Byron W. King, Agora Financial’s editor of Outstanding Investments, who has explored exactly this topic in his letter to readers today:

“Keep in mind, though, that BP is a critical part of the U.S. energy system. By extension, BP is important to the U.S. government and national energy policy.

“The fact is that BP is the largest oil producer in the U.S., at over 400,000 barrels per day just from the Gulf of Mexico. Up north, BP has a dominant position at Prudhoe Bay, Alaska, a field that lifts about another 400,000 barrels of oil per day. BP has a controlling interest in the Alaska Pipeline.

“Then there’s BP’s nationwide, downstream refining and product-marketing system. Think about how many cars, trucks, buses, railway locomotives and airplanes run on BP fuel, delivered under one contract or another. Try sorting that mess out if BP goes down hard.

“Consider that BP is a large, global concern. Every day, across the world, BP produces about 4 million barrels of oil equivalent (BOE). That’s about 4.7% of the world’s liquid energy supply. Also, BP has 42 major, new oil projects under development, and scheduled to be online by 2015, producing another 1 million BOE per day. Screw that up by putting BP out of business, and we’ll probably see those $200 per barrel oil prices sooner than we thought…

“…If push comes to shove, you should expect that BP will have the full backing of the UK government. BP is a huge employer in Britain. BP pays an immense amount of taxes to the UK government, and the UK government needs those funds. Pres. Obama may have returned a bust of Winston Churchill to the British, early in his presidency. But the British will want Obama’s head on a platter if BP goes down under his administration.

“Right now, the dividend yield for BP is 7.4%. That’s nice, but the high return probably includes the risk that the BP board will — sooner or later — slash the dividend. It would be unseemly for BP to be paying large dividends, at the same time that it’s also diverting funds to well-control and cleanup costs, not to mention handling damage claims. So the dividend is no longer safe, in my view.

“Here’s something else. BP may as well change its business model to include being a professional defendant. In years to come, BP will devote immense amounts of money and management time to litigation.

“BP may even have a hard time making future energy development deals, due to the Deepwater Horizon legacy issues. I can hear it now. ‘Oh yes, you’re the company that blew out that well in the Gulf of Mexico.’ The image problem may extend to BP having a hard time recruiting talent in years to come, due to the stigma.

“So we come back full circle to that question. Is BP too big to fail? I don’t think BP will ‘fail.’ That is, BP is going to ‘pay’ but not fail.”

King recognizes the damage to BP’s reputation and credibility that this disaster has caused. Yet, he also sees the firm as too important to the UK government as a taxpayer, and to the US as a producer, for this leak alone to destroy BP’s future prospects.

To keep following King’s evolving perspective on BP in Outstanding Investments you should visit the Agora Financial reports page, found here.

Written by Daily Reckoning - Rocky Vega - 5/25/10