Thursday, June 24, 2010
Despite Massive Liability over Oil Spill, BP a Long Way from Bankruptcy
Many bankruptcy experts share the opinion that BP is unlikely to be forced into bankruptcy over their liability for the oil spill currently ravaging the Gulf of Mexico – at least in the short term. For the moment, BP remains a financially strong and stable company, despite the plummeting value of their shares.
BP still has access to billions of dollars in credit, solid cash flow, and a healthy balance sheet. These factors should help the oil company weather the storm as the cost of cleaning up the oil spill and compensating victims for their damages escalates over the coming months.
However, BP still does not have a timetable for when they will be able to cap the well which is dumping massive quantities of oil into the Gulf of Mexico. If the spill continues into 2011 and costs for BP enter the $75-100 billion range, then Chapter 11 bankruptcy may become a possibility.
It is not uncommon for companies facing major liability over their negligent actions to file Chapter 11 bankruptcy. This provides the company protection from creditors, creates a course of action to value claims, and establishes a trust to cover these claims. Filing bankruptcy also provides the additional benefit of consolidating all legal claims in one court before one judge. This eliminates the risk of facing multiple jury trials in multiple jurisdictions across the country.
While this may seem to be an attractive option for a company facing the lofty price tag associated with cleaning up the largest oil spill in our nation's history, BP is too financially strong at the moment for a bankruptcy court to grant a Chapter 11 petition. Only time will tell if they are able to maintain their financial solvency as this crisis continues to worsen.