BP - BNP July 2010

Equity Research BP
Oil & Gas - United Kingdom 7 July 2010

Integrated Oil & Gas
Report - Large Caps Outperform

Rating TP EPS 10e EPS 11e
Target price 450p (+30%)
(35%) (47%) NM Sector rating Outperform
Price (6 July 2010)

Market cap. (USDbn / EURbn)
346p
98.3 / 77.7 'Well from hell' - but a positive risk/reward
Free float (USDbn / EURbn) 98.3 / 77.7
EV (USDbn / EURbn) 145.8 / 115.2
3m avg. volume (USDm / EURm) 577.6 / 456.4
Reuters/Bloomberg BP.L/BP/ LN
We incorporate Macondo spill costs into our forecasts
Financial data 12/09 12/10e 12/11e 12/12e We identify and model scenarios for four types of costs and fines: well containment,
Adjusted EPS (p) 49.36 33.14 (16.06) 48.08 clean up costs, claims for economic damage and Clean Water Act fines. We
Adjusted EPS (USD) 0.77 0.50 (0.24) 0.73
EPS - IBES (p) 47.27 63.52 73.39 82.70 incorporate the most likely one in our forecasts, which leads to EPS downgrades of
Net dividend (p) 37 5 20 21
47% in 2010 and 24% by 2013, for a cumulative USD46.7bn of Macondo costs. Our
Sales (USDm) 231,791 271,522 253,557 262,039 scenario is harsh - we presume BP is proved negligent, stops the leak late (at end
Adjusted EBIT (USDm) 22,430 29,520 25,760 27,932
Adj. net profit (USDm) 14,576 9,537 (4,617) 13,825 August) and incurs 100% of costs and fines, rather than its 65% share of the licence.
Adj. net debt / EBITDA (x) 0.8 0.8 0.6 0.4
Stockmarket ratios* 12/09 12/10e 12/11e 12/12e BPs financial response leads to 7% pa EPS downgrades 2011-14 pre costs
P/E (x) 10.5 10.4 - 7.2 The USD10bn of upstream asset sales now targeted for 2010, a 10% capex cut and
P/BV (x) 1.5 1.0 1.0 0.9
Net yield (%) 7.1 1.4 5.7 6.0 the assumed BP brand impairment in the US hence lower sales leaves EPS pre
FCF yield (%) 4.2 (1.6) 6.2 8.3
EV/Sales (x) 0.8 0.5 0.5 0.5 Macondo costs lower by 7% pa on average in 2011-14. However the measures also
EV/EBITDA (x) 5.5 3.5 3.4 3.1 restrain gearing post Macondo costs to 25% by end 2010 still within BPs previously
EV/EBIT (x) 8.5 4.9 5.2 4.6
* Yearly average price for FY ended 12/09 targeted range of 20-30%.
Performance* (%) 1w 1m 3m 12m
Absolute 14 (20) (46) (21)
Higher WACC and lowered EPS lead to 35% Target Price reduction to 450p
Rel. Oil & Gas 9 (15) (29) (22) With a higher 9.1% WACC (from 7.8% before due to higher risk and cost of debt) and
Rel. DJ STOXX50 11 (20) (35) (31)
* In listing currency, with dividend reinvested the lower EPS, our DCF based target price is cut by 35% to 450 pence. At that TP BP
Price relative to DJ STOXX50 would trade on an appropriately lower 3% 2011e EV/DACF premium to the sector,
800 compared with a 22% historical 10 year average premium.
700
Despite this well from hell risk reward appears skewed to the upside
The key catalyst, the date of stopping the leak, may come earlier than our end August
600
assumption. An early August date, coupled with no negligence and hence a 65% BP
500 share of costs, would leave the TP at 550 pence. Even a higher cost/fine scenario
would leave 26% upside to a 430 pence fair value. We conclude that, despite the well
400
from hell, risk/reward is now skewed to the upside.
300
Irene Himona Alexandre Marie (+44) 207 039 9427

200
Jan 07 Jan 08 Jan 09 Jan 10
(+44) 207 039 9526 Charles Riou (+44) 207 039 9512
irene.himona@exanebnpparibas.com
Relative to DJ STOXX50 (Pence) BP
www.exanebnpparibas-equities.com
Please refer to important disclosures

at the end of this report.
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Price at 06 Jul. 10 / Target Price
346p / 450p +30% BP (Outperform)
Reuters / Bloom berg: BP.L / BP/ LN Analys t: Irene Him ona (+44) 207 039 9526 Integrated Oil & Gas | Oil & Gas (Outperform) - United Kingdom
Com pany Highlights USDm / EURm
1,000.0
Enterprise value 145,827 / 115,233
900.0
Market capitalisation 98,281 / 77,661
Free float 98,281 / 77,661
3m average volume 578 / 456 700.0
Pe rform ance (*) 1m 3m 12m

A bsolute (20%) (46%) (21%)
Rel. Sector (15%) (29%) (22%) 500.0
T arget P rice
Rel. DJ STOXX50 (20%) (35%) (31%)
12m Hi/Lo : 655p -47% / 303p +14%
CAGR 2002/2010 2010/2014
EPS restated (**) 5% 19%
287.8
CFPS 2% 23% P rice 7.0*C FP S R elative to D J ST OXX50 (P ence)
Price (yearly avg from Dec. 01 to Dec. 09) 575.7 511.1 417.5 489.3 592.3 624.2 569.8 534.3 516.5 345.5 345.5 345.5 345.5 345.5
PER SHARE DATA (p) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
No of shares year end, basic, (m) 22 432.077 22 378.651 22 122.610 21 525.978 20 657.045 19 510.496 18 922.786 18 725.073 18 739.590 18 739.590 18 739.590 18 739.590 18 739.590 18 739.590
A verage no of shares, diluted, excl. treasury stocks (m) 22 573.725 22 504.448 22 423.652 22 292.536 21 411.447 20 195.458 19 236.956 18 873.664 18 939.353 18 958.469 18 942.998 18 942.998 18 942.855 18 942.855
EPS restated (USD) 0.44 0.34 0.56 0.76 1.02 1.04 0.98 1.39 0.77 0.50 (0.24) 0.73 0.79 0.99
EPS restated (p) 31 23 35 42 56 56 49 76 49 33 (16) 48 52 66
% change NS (26.8%) 53.4% 20.4% 35.3% (0.1%) (12.6%) 54.2% (34.9%) (32.9%) NS NS 8.2% 26.0%
CFPS 50.27 49.67 49.49 64.19 78.97 75.10 78.20 92.87 104.73 56.23 81.92 94.25 112.54 128.59
Book value (BV PS) (a) 201.7 190.2 191.4 195.0 212.9 235.7 247.5 266.1 347.8 356.4 360.7 374.8 408.1 449.3
Net dividend 15.00 15.88 15.66 15.25 19.15 21.10 21.00 29.39 36.88 4.89 19.54 20.72 22.37 27.97
STOCKM ARKET RATIOS YEARLY AV ERAGE PRICES for e nd De c. 01 to De c. 09 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
P / E (P/ EPS restated) 18.7x 22.7x 12.1x 11.7x 10.5x 11.1x 11.6x 7.0x 10.5x 10.4x NC 7.2x 6.6x 5.3x
P / E relative to DJ STOXX50 78% 102% 76% 84% 80% 100% 106% 52% 92% 111% NC 99%
P / CF 11.5x 10.3x 8.4x 7.6x 7.5x 8.3x 7.3x 5.8x 4.9x 6.1x 4.2x 3.7x 3.1x 2.7x
FCF yield 2.3% 1.5% 0.5% 4.3% 5.9% 5.6% 2.8% 7.7% 4.2% (1.6%) 6.2% 8.3% 13.4% 17.3%
P / BVPS 2.85x 2.69x 2.18x 2.51x 2.78x 2.65x 2.30x 2.01x 1.49x 0.97x 0.96x 0.92x 0.85x 0.77x
Net yield 2.6% 3.1% 3.8% 3.1% 3.2% 3.4% 3.7% 5.5% 7.1% 1.4% 5.7% 6.0% 6.5% 8.1%
Payout 48.8% 70.4% 45.3% 36.6% 34.0% 37.5% 42.7% 38.7% 74.7% 14.7% NC 43.1% 43.0% 42.7%
EV / Sales 1.42x 1.34x 1.09x 1.19x 1.05x 0.97x 0.88x 0.62x 0.82x 0.54x 0.53x 0.49x 0.44x 0.39x
EV / Restated EBITDA 8.3x 9.6x 6.9x 7.2x 6.4x 6.3x 6.5x 3.8x 5.5x 3.5x 3.4x 3.1x 2.7x 2.4x
EV / Restated EBIT 12.6x 16.8x 9.9x 9.7x 8.3x 8.1x 8.8x 4.7x 8.5x 4.9x 5.2x 4.6x 4.1x 3.7x
EV / OpFCF 22.9x 36.3x 34.5x 18.1x 12.8x 11.9x 19.9x 9.4x 14.8x NC 18.3x 12.8x 7.3x 5.1x
EV / Capital employed (incl. gross goodw ill) 2.2x 1.9x 1.8x 2.1x 2.5x 2.3x 2.1x 1.9x 1.4x 1.0x 1.0x 0.9x 0.8x 0.7x
ENTERPRISE VALUE (USDm ) 211,207 201,185 184,721 232,323 256,487 261,843 255,359 222,547 190,685 145,827 134,616 129,631 120,020 107,789
Market cap 185,950 171,687 151,150 195,527 227,575 230,055 218,325 184,000 150,868 98,281 98,281 98,281 98,281 98,281
+ A djusted net debt 19,609 20,273 20,269 21,732 16,373 21,122 26,817 25,041 26,161 33,822 22,669 17,713 8,166 (4,000)
+ Other liabilities and commitments 3,941 7,510 10,842 11,649 10,294 8,380 7,975 11,882 12,913 12,913 12,865 12,865 12,865 12,865
+ Revalued minority interests 1,707 1,716 2,459 3,415 2,245 2,286 2,242 1,624 742 812 802 772 709 644
- Revalued investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0
P & L HIGHLIGHTS (USDm ) Sw itch to IFRS data from FY e nde d 12/04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
Sale s 148,502 149,674 169,441 194,919 243,948 270,602 288,951 361,143 231,791 271,522 253,557 262,039 271,283 277,443
Re s tate d EBITDA (b) 25,465 20,987 26,825 32,395 39,843 41,593 39,553 58,517 34,536 42,161 39,267 41,941 43,815 44,580
Depreciation (8,683) (9,011) (8,076) (8,529) (8,771) (9,128) (10,579) (10,985) (12,106) (12,641) (13,507) (14,009) (14,589) (15,195)
Re s tate d EBIT (b) (**) 16,782 11,976 18,749 23,866 31,072 32,465 28,974 47,532 22,430 29,520 25,760 27,932 29,226 29,385
Reported operating profit (loss) 12,773 10,724 16,816 22,851 28,526 30,962 27,766 30,682 21,732 5,664 10,506 14,830 20,804 25,616
Net f inancial income (charges) (976) (499) (299) (165) (148) 185 13 (220) (510) (541) (762) (425) (154) 186
A ff iliates 1,195 964 1,214 2,280 3,543 3,995 3,832 3,821 3,901 4,144 3,068 3,186 3,198 3,274
Other 0 0 (63) (622) 184 (25) 0 0 0 0 0 0 0 0
Tax (6,375) (4,317) (5,050) (7,082) (9,582) (12,516) (10,442) (12,617) (8,365) (5,492) (5,994) (7,755) (8,135) (9,886)
Minorities (61) (77) (170) (187) (291) (286) (324) (509) (181) (347) (272) (329) (338) (347)
Goodw ill amortisation (1,246) (1,274) 0 - - - - - - - - - - -
Net attributable prof it reported 6,556 6,795 12,448 17,075 22,232 22,315 20,845 21,157 16,577 3,429 6,545 9,507 15,376 18,843
Ne t attributable profit re s tate d (c) 8,755 6,334 12,666 17,007 21,946 20,927 18,931 26,243 14,576 9,537 (4,617) 13,825 14,960 18,843
CASH FLOW HIGHLIGHTS (USDm ) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
EBITDA (re porte d) 22,702 21,009 24,892 31,380 37,297 40,090 38,345 41,667 33,838 18,305 24,013 28,839 35,393 40,811
EBITDA adjus tm e nt (b) 2,763 (22) 1,933 1,015 2,546 1,503 1,208 16,850 698 23,856 15,254 13,102 8,422 3,769
Other items (4,025) (1,026) (3,904) (1,546) (2,342) (4,248) (2,356) (16,454) 3,354 (24,380) (14,466) (12,285) (7,576) (2,912)
Change in WCR 1,051 (991) (2,063) (3,117) (4,437) 380 (5,902) 5,348 (3,596) (341) 750 (450) 0 0
Ope rating cas h flow 22,491 18,970 20,858 27,732 33,064 37,725 31,295 47,411 34,294 17,441 25,551 29,206 36,239 41,668
Capex (13,264) (13,423) (15,502) (14,876) (13,085) (15,732) (18,445) (23,748) (21,392) (18,062) (18,184) (19,084) (19,864) (20,564)
Ope rating fre e cas h flow (OpFCF) 9,227 5,547 5,356 12,856 19,979 21,993 12,850 23,663 12,902 (621) 7,367 10,122 16,375 21,104
Net f inancial items + tax paid (5,004) (3,027) (4,555) (4,354) (6,343) (9,053) (6,586) (9,316) (6,579) (1,011) (1,246) (1,909) (3,149) (4,014)
Fre e cas h flow 4,223 2,520 801 8,502 13,636 12,940 6,264 14,347 6,323 (1,633) 6,121 8,213 13,227 17,090
Net f inancial investments & acquisitions 1,693 2,458 6,221 3,545 11,356 6,214 3,608 981 3,259 (3,577) 10,200 2,200 2,200 2,200
Other (1,398) 235 545 (228) 39 (1,252) (489) 482 (171) 0 0 0 0 0
Capital increase (decrease) (1,133) (573) (1,889) (7,208) (11,315) (15,151) (7,113) (2,567) 207 383 340 340 340 340
Dividends paid (4,881) (5,304) (5,674) (6,074) (8,186) (7,969) (8,333) (10,767) (10,899) (2,856) (5,508) (5,798) (6,219) (7,464)
Incre as e (de cre as e ) in ne t financial de bt 1,496 664 (4) 1,463 (5,530) 5,218 6,063 (2,476) 1,281 7,683 (11,153) (4,955) (9,548) (12,166)
Cas h flow , group s hare 16,336 16,764 18,123 26,207 30,750 27,911 30,096 32,124 30,927 16,182 23,555 27,102 32,359 36,974
BALANCE SHEET HIGHLIGHTS (USDm ) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
Fixed operating assets, incl. gross goodw ill 95,919 106,847 103,670 108,479 101,090 107,025 115,421 124,466 129,701 138,699 133,176 136,051 139,126 142,295
WCR (1,959) (2,541) (2,412) 3,419 2,072 4,635 8,663 (4,456) 3,388 3,729 2,979 3,429 3,429 3,429
Capital e m ploye d, incl. gros s goodw ill 93,960 104,306 101,258 111,898 103,162 111,660 124,084 120,010 133,089 142,428 136,155 139,480 142,555 145,724
Shareholders' funds, group share 65,143 63,834 69,139 76,892 79,976 84,624 93,690 91,303 101,613 101,384 102,613 106,623 116,100 127,815
Minorities 598 638 1,125 1,343 789 841 962 806 500 899 899 899 899 899
Provisions/ Other liabilities 22,968 29,348 34,472 36,639 36,729 41,090 43,688 40,282 43,302 46,558 50,234 54,527 57,697 61,341
Net f inancial debt (cash) 19,609 20,273 20,269 21,732 16,202 21,420 27,483 25,007 26,288 33,971 22,818 17,862 8,315 (3,851)
FINANCIAL RATIOS (%) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
Sales (% change) NS 0.8% 13.2% 15.0% 25.2% 10.9% 6.8% 25.0% (35.8%) 17.1% (6.6%) 3.3% 3.5% 2.3%
Organic sales grow th 0.8% 13.2% 15.0% 25.2% 10.9% 6.8% 25.0% (35.8%) 17.1% (6.6%) 3.3% 3.5% 2.3%
Restated EBIT (% change) (**) NS (28.6%) 56.6% 27.3% 30.2% 4.5% (10.8%) 64.1% (52.8%) 31.6% (12.7%) 8.4% 4.6% 0.5%
Restated attributable net prof it (% change) (**) NS (23.9%) 66.5% 34.3% 29.0% (4.6%) (9.5%) 38.6% (44.5%) (34.6%) NS NS 8.2% 26.0%
Personnel costs / Sales 4.9% 5.0% 5.1% 5.1% 4.4% 3.9% 4.0% 3.4% 5.3% - - - - -
Restated EBITDA margin 17.1% 14.0% 15.8% 16.6% 16.3% 15.4% 13.7% 16.2% 14.9% 15.5% 15.5% 16.0% 16.2% 16.1%
Restated EBIT margin 11.3% 8.0% 11.1% 12.2% 12.7% 12.0% 10.0% 13.2% 9.7% 10.9% 10.2% 10.7% 10.8% 10.6%
Tax rate 48.9% 37.5% 30.6% 31.2% 33.8% 40.2% 37.6% 41.4% 39.4% NC 61.5% 53.8% 39.4% 38.3%
Net margin 4.5% 4.6% 7.4% 8.9% 9.2% 8.4% 7.3% 6.0% 7.2% 1.4% 2.7% 3.8% 5.8% 6.9%
Capex / Sales 8.9% 9.0% 9.1% 7.6% 5.4% 5.8% 6.4% 6.6% 9.2% 6.7% 7.2% 7.3% 7.3% 7.4%
OpFCF / Sales 6.2% 3.7% 3.2% 6.6% 8.2% 8.1% 4.4% 6.6% 5.6% (0.2%) 2.9% 3.9% 6.0% 7.6%
WCR / Sales (1.3%) (1.7%) (1.4%) 1.8% 0.8% 1.7% 3.0% (1.2%) 1.5% 1.4% 1.2% 1.3% 1.3% 1.2%
Capital employed (excl. gross goodw ill) / Sales 50.8% 56.9% 50.9% 49.5% 36.1% 35.3% 36.9% 27.3% 48.2% 43.8% 44.5% 44.3% 43.9% 44.1%
ROE (bef ore goodw ill) 15.4% 11.9% 18.3% 22.1% 27.4% 24.7% 20.2% 28.7% 14.3% 9.4% (4.5%) 13.0% 12.9% 14.7%
Gearing 30% 31% 29% 28% 20% 25% 28% 27% 26% 33% 22% 16% 7% (3%)
EBITDA / Financial charges 34.5x 49.3x NC NC 13,281.0x 2,446.6x 70.1x 72.2x 108.6x 109.3x 72.4x 205.1x NC NC
A djusted financial debt / EBITDA 0.8x 1.0x 0.8x 0.7x 0.4x 0.5x 0.7x 0.4x 0.8x 0.8x 0.6x 0.4x 0.2x NC
ROCE, excl. gross goodw ill 10.7% 6.5% 11.9% 15.7% 21.6% 18.8% 15.1% 30.2% 11.1% 6.6% 9.0% 10.6% 13.6% 13.5%
ROCE, incl. gross goodw ill 8.6% 5.3% 10.1% 13.5% 18.4% 16.1% 13.0% 24.8% 9.3% 5.5% 7.5% 8.8% 11.3% 11.3%
WA CC 7.7% 7.5% 7.5% 7.7% 6.9% 6.9% 6.9% 9.0% 8.5% 8.7% 8.7% 8.7% 8.7% 8.7%
A verage number of employees 109,150 116,300 108,150 104,200 102,700 97,100 97,200
(a) Intangibles: USD20,168.00m, or USD1p per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost
(c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles from M&A, exceptional restructuring, (*) In listing currency, with div. reinvested, (**) also adjusted for am. of intangibles from M&A, or for am. of gwill for pre IFRS years
2 BP
Contents
Investment case__________________________________________ 4
Financials & Valuation _____________________________________ 6

Macondo costs: USD46.7bn a harsh base case ___________________________ 6
BPs response - impact on growth and earnings _____________________________ 7
EPS excluding Macondo costs: 7% pa lower 2011-14 _________________________ 8
Cost of capital increased from 7.8% to 9.1% _______________________________ 9
Target price: from 690 pence to 450 pence per share ________________________ 10
Risk/reward appears positive ___________________________________________ 11
Equity & Bond markets - signals of distress____________________ 15
Identifying the costs ______________________________________ 17
Counting the costs scenarios _____________________________ 19

Costs of stopping the leak and clean up ___________________________________ 19
Fines ______________________________________________________________ 21
Claims the USD20bn escrow account might be enough _____________________ 24
Punitive damages impossible to define______________________ 28

Macondo the seven failures identified by BP______________________________ 28
The five BP decisions questioned by Congress _____________________________ 30
Peer group views and some conclusions __________________________________ 31
Funding analysis ________________________________________ 35
Financial highlights ______________________________________ 39
3 BP
Investment case
In this note we examine closely the four categories of costs BP is liable for in the
Macondo accident: well control and containment costs; clean up costs; fines and claims
for economic damage. For all cost categories we construct reasonable scenarios, and
take as our central case a relatively harsh USD47bn, which we include in our financial
forecasts and valuation. This results in an EPS downgrade of 47% this year and 24% in
2012.
Figure 1: BP EPS changes including base case Macondo cost scenario

2010e 2011e 2012e 2013e 2014e
Old EPS (ex Macondo) 94.9 92.7 101.3 103.9 107.6
New EPS (incl Macondo) 50.5 (24.4) 73.0 79.0 99.5
Change (%) (46.8) nm (28.0) (24.0) (7.5)
Source: Exane BNP Paribas estimates
BPs response to sell USD7bn more assets than previously planned a total of
USD10bn in 2010 - and to reduce by 10% its 2010-11 organic capex, lead us also to
cut annual production by c.120kboed - more than the CEOs guidance of a 50kboed
loss.
Figure 2: BP Production profile post Macondo & asset disposals

CAGR09-14e
000 boed 2009 2010e 2011e 2012e 2013e 2014e (%)
Previous forecast 3,998 3,984 4,019 4,120 4,174 4,194 1.0
Current Forecast 3,998 3,910 3,902 3,998 4,054 4,073 0.4
Output reduction nm 75.0 118.4 121.9 119.9 121.3
We further reduce US marketing sales to capture brand damage. Medium term growth
assumed in the DCF is consequently reduced and in combination with a WACC
increase from 7.8% to 9.1% - reflecting wider CDS spreads and a higher company
specific risk profile - results in a 35% cut to out DCF based target price, from 690 pence
to 450 pence per share.
At the new TP, BPs EV/DACF would stand on a 3% premium to the sector, compared
with its historical 10-year average premium of 22%, shown in the chart below. We see
this reduction in premium as necessary to reflect the impairment to BPs business and
deterioration in competitive position, especially in its key US market, representing a
third of BPs reserves and half of its refining capacity.
The upside remains material enough and combined with an, in our view, positive
risk/reward, leads us to retain the outperform rating. However, this remains a high risk,
potentially high volatility investment there is only one near term catalyst (stopping the
leak) with a second one next February (reinstituting dividends), with lesser catalysts in
the form of: announcing the planned asset disposals, any senior management change,
strategic investments etc.
4 BP
Figure 3: BP EV/DACF premium/(discount) to sector and 10 year average
premium
50%
40%
30%
20%
10%
0%
(10%)
(20%)
10 year average
(30%)
(40%)
(50%)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010e
2011e
2012e
2013e
2014e
Source :Exane BNP Paribas
Our central cost case deliberately verges on the worst case, since we have assumed
that BP will be proven negligent, thereby having to pay for 100% of such costs, with no
contribution from partners Anadarko and Mitsui. We further assume that under the
Clean Water Act it will have to pay the maximum fine applicable to negligence of
USD4,300 per net barrel leaked - amounting to USD16.0bn; and, finally, that its relief
wells will not work first time, and hence that it will take until end August to plug the leak.
Should the company be liable to pay for only 65% of the costs corresponding to its
license interest and should they stop the leak at end July rather than end August then
clearly the size of the liabilities declines materially and the target price, instead of 450
pence, would rise towards
Figure 4: BP Macondo well costs & BP DCF: three cost scenarios

USDm Low Base High
Well containment & spill clean up costs 6,000 10,779 15,500
Claims fund 13,000 20,000 20,000
Fines (Clean Water Act) 2,031 16,000 16,000
Totals - pre tax 21,031 46,779 51,500
BP DCF value pence per share 550 450 430
Note: base and high cases assume BP pays for 100% of costs, low case assumes 65%
Source: Exane BNP Paribas
5 BP
Financials & Valuation
We have amended our earnings and cash flow forecasts to capture (1) our estimate of
a harsh base case for USD46.8bn of Macondo costs and (2) the impact of the changes
to BPs financial strategy consequent to the June 16th agreement with the US
administration.
Macondo costs: USD46.8bn a harsh base case

A single word describes the impact of Macondo on BP uncertainty. Hence this note
explores different scenarios of the cost categories relating to the accident, of which we
are able to quantify four types: the costs of well control and spill containment; costs of
cleaning up; claims for lost business due to the spill - agreed at USD20bn for the time
being; and fines under the Clean Water Act (depending on the flow rate, timing of the
spill and BPs capture rate).
The potential fifth category of punitive damages may or may not be allowed under the
Oil Pollution Act (OPA) legal opinion is unclear and we have therefore left that aside.
We also took the view that in the US judicial system, punitive damages often amount to
a seemingly random number produced by a jury which BP can spend years fighting in
the courts meaning, its NPV might or might not be material.
Of the different scenarios analysed we choose to include in our financials a likely case
of USD46.8bn, made up of the following components.
Figure 5: BP Macondo well likely but harsh base case cost scenario for
USD46.8bn
Macondo Cost assumptions 2010 2011e 2012e 2013e 2014e 2010-14e
Well containment & spill clean up costs 9223 1100 250 200 0 10773
Claims fund 5000 5000 5000 5000 0 20000
Fines (Clean Water Act) 0 16000 0 0 0 16000
Totals - pre tax 14223 22100 5250 5200 0 46773
Note: well containment & clean up costs assumed at c. USD3bn per quarter in 2010; the USD16bn fine assumes
negligence. All figures reflect 100% of the costs, not BPs 65% of the licence.
In particular, we have assumed that (a) BP will pay 100% of all costs and fines, with no
contribution from licence partners Anadarko and Mitsui; and (b) for the purposes of the
Clean Water Act fines, we assume BP is proven negligent and thus pays the higher
fines of USD4,300 per barrel of spill (less captured barrels). A more favourable
scenario would see BP paying only for its 65% share of the licence, which would lower
the total costs by 35% to USD21bn.
Whether or not BPs partners pay their share of costs will in part be determined by the
causes of the accident, but it appears to us that the BP case may not be as water tight
as originally thought. In fact as all this is highly uncertain, we take the most
conservative route and assume that negligence is proven hence that BP pays the bill all
on its own.
6 BP
So far Macondo has been completely unpredictable: high expectations at the start that
the well could be capped with the top kill procedure by end May came to nothing. We thus
adopt the prudent approach of high cost estimates rather than the hopeful approach of
lower cost estimates at this point. Whilst the key will be the date when the well is finally
killed, there is no easy way of telling whether that can happen early, on time, late or if the
initial attempt fails, so that BP has to rely on relief well No 2 which would obviously
scare the markets again and will introduces a delay. Our high cost case, seen below,
assumes that it takes BP until end September to stop the leak, with the costs of well
containment and obviously cleaning up rising 45% versus our base case.
On the other side the low case assumes that (a) BP is not found negligent hence it
pays 65% of the costs, with its partners contributing the difference; (b) the well is
stopped early (in early August) with 26% lower clean up costs versus our central case.
And (c) that the fines under the Clean Water Act, with no negligence, amount to
USD3.1bn of which BPs share is USD2.0bn.
Figure 6: BP Macondo well costs - three cost scenarios (2010-14 aggregates)

USDm Low Base High
Well containment & spill clean up costs 6,000 10,779 15,500
Claims fund 13,000 20,000 20,000
Fines (Clean Water Act) 2,031 16,000 16,000
Totals - pre tax 21,031 46,779 51,500
BPs response - impact on growth and earnings

When BP agreed to set up the uncapped USD20bn claims fund with the US
administration to be gradually funded by the end of 2013 it also announced a series
of actions aimed at saving the group that USD20bn internally, rather than requiring a
capital injection. Specifically BP announced:
1) the suspension for three quarters (Q1-Q3 2010) of the 14 cents per share quarterly
dividend. At the time of the Q4 and full year 2010 results in February 2011 the Board
will look at the Macondo liabilities in order to decide whether to reintroduce a quarterly
dividend. We assume they will, but only at half the previous quarterly payment, or 7
cents per share. The 2010 suspension on its own will save BP USD2.6bn per quarter or
USD7.8bn in 2010.
2) A 10% reduction in group organic capex in 2010 and 2011. Given the previous
USD20bn pa budget (which excludes self-funded equity affiliates TNK BP and Pan
American), this amounts to a cumulative saving of USD4.0bn over 2010-11. Clearly
part of the capex reduction will relate to the accelerated asset disposals discussed
below; equally, we cannot but presume that some discretionary spending will also go.
We do therefore expect some negative impact on growth rates and we have
consequently reduced the medium term growth rate in our DCF (to 2030) from 1.8% to
1.5% (long term growth remains at 1%).
3) A USD10bn asset disposal programme in 2010 this compares with BP's pre-
Macondo asset disposal plan of USD2.0-3.0bn pa. It is normal to turn-around 1%- 2%
of a portfolio with USD170 billion of fixed assets on the balance sheet. The groups
(previous) production guidance of 1%-2%pa volume growth was inclusive i.e took
account of these on going assets disposals. Therefore, the intention to sell USD10.0bn
of assets (6% of the portfolio) means that incrementally, BP will dispose of an extra
USD7bn over and above their plan. So BP will attempt to sell this year assets that
might have otherwise taken them 3 years to dispose of.
7 BP
There is nothing wrong in principle with accelerating the rationalisation of non-core or
mature assets which would occur in any case - unless the perception of a "distressed
seller" suppresses the price achieved, or the timing is more protracted than planned, or
they are forced to sell not only the non core, but some core assets too, perhaps in the
Gulf of Mexico itself (high margin barrels).
4) Finally as security for the USD20bn claim fund the company agreed to set aside
North American assets worth USD20bn, of which it retains ownership and control to
cash, and which will decline as the value of the claims fund builds up towards the
agreed USD20bn.
If all of the USD10bn of asset disposals announced by BP were to occur in the

upstream, then at the average global M&A price of c. USD10.0 per barrel of proved &
probable reserves, we might deduce that BP would sell something around 1 billion of
2P barrels of reserves. Given an average 2P reserve life of c. 22 years, the sale of
1.0bnboe of reserves would correspond to 45.4 million boe per annum or to the sale of
124,000 boed of production - around 3% of its global output.
Hence, we have reduced our production forecasts accordingly by approximately that

amount and as seen here, the result is that the previously targeted and assumed BP 5
year production growth CAGR of 1% turns into 0.4% (so close to static). That may well
be the most realistic assumption at the moment, in our view.
Figure 7: BP Production profile post Macondo & asset disposals

000 boed 2009 2010e 2011e 2012e 2013e 2014e CAGR09-14e (%)
Previous forecast 3,998 3,984 4,019 4,120 4,174 4,194 1.0
Current Forecast 3,998 3,910 3,902 3,998 4,054 4,073 0.4
Output reduction nm 75.0 118.4 121.9 119.9 121.3
We recognise that some of the asset disposals will possibly include acreage and
contingent resources - rather than 2P reserves. Moreover some of the asset disposals
will be mature or low value barrels. Pan American the 60% BP owned Argentinean
E&P affiliate - is a "convenient" target for outsiders to focus on - it is a clearly
identifiable entity, it is low value barrels (as with Repsol's YPF) thanks to the near
decade long price regulation that followed Argentina's debt default. Plus, there has
been a sale of Argentinean assets to the Chinese last year (Bridas).
In aggregate the three announced measures will save BP some USD18.8bn of cash
outflow in 2010-11 (mostly in 2010).
EPS excluding Macondo costs: 7% pa lower 2011-14

Apart from the lower production volume resulting from asset disposals, US sales under
the BP brand are likely to suffer, we think, and we have amended both upstream and
downstream forecasts accordingly. Hence, the EPS forecasts decline by c. 7% pa on
average, as shown next (this excludes the Macondo costs).
Figure 8: BP EPS changes excluding Macondo 2011-14e

2011e 2012e 2013e 2014e
Old EPS 93 101 104 108
New EPS 84 94 99 99
Change (%) (8.9) (7.5) (4.3) (7.5)
8 BP
Moreover, we have decided to treat the Macondo costs as recurring. We present below
the EPS reduction once we take account not only the impact of assumed asset
disposals but also the assumed cumulative USD46.8bn of pre tax Macondo costs for
the period 2010-13.
With its forthcoming Q2 results (due July 27th) BP will ring fence Macondo costs and
report them as a non-operating special item - so as to enable us to look at underlying
profitability. Moreover, the cash costs actually incurred will be expensed directly in the
P&L but BP is indicating that will also set up a provision for those costs which it can
reasonably estimate at this stage.
We take the view that the size of Macondo is so material and the costs will be incurred
over a period of years as to qualify it as underlying thus the USD20bn claim fund
agreed with the US government, for example, will be financed by BP at the rate of
USD5bnpa until end 2013 (so USD20bn is in money of the day rather than the NPV).
So these are well defined cash outflows, which will continue for a number of years. As
a result of including these costs in our P&L, the 2010 EPS declines 46.8% whilst the
impact begins to fade out by 2014 on our presumption that most costs are incurred
relatively quickly.
Figure 9: BP EPS changes including base case Macondo cost scenario

2010e 2011e 2012e 2013e 2014e
Old EPS (ex Macondo) 94.9 92.7 101.3 103.9 107.6
New EPS (incl Macondo) 50.5 (24.4) 73.0 79.0 99.5
Change (%) (46.8) nm (28.0) (24.0) (7.5)
Cost of capital increased from 7.8% to 9.1%

The accident, its consequent near term massive cash requirements on BP, and the
overall uncertainty over the size of potential liabilities have distressed both the equity
and debt markets. On the equity side, the historic 30 day volatility of BP shares has
gone from sub 20 in April to 78 now. The companys previous beta was under 1.0 but
we see this rising. Higher risk oil linked stocks like the E&Ps have a beta typically
above 1.2. So we choose a level of 1.15 on the presumption that, once Macondo is
stopped in August/September, perceived risk should decline, though not to its
historically low levels.
Moreover, we have seen BPs CDS spreads exploding towards 600bp, as the
companys credit rating was downgraded. Clearly it is much more expensive for BP to
raise debt post Macondo and we have captured this in the WACC in terms of a cost of
debt (post tax) which we raised from 2.6% to 3.25% longer term. Finally, we do also
assume a lower desired gearing ratio. All of BPs actions to date indicate a desire to
conserve cash, which clearly means a lower debt/equity ratio than would have been the
case hitherto.
9 BP
Figure 10: BPs Higher WACC
Old New
Beta 1.0 1.15
Risk free 3.5 3.0
Risk premium 5.6 6.4
Cost of Equity 9.1 10.4
Cost of debt 4.0 5.0

Tax 35 35
Post tax cost of debt 2.6 3.25
Gearing ratio target 20 18
WACC 7.8 9.1
Note: we assume a lower targeted gearing/higher cash post Macondo

Target price: from 690 pence to 450 pence per share

The c.50% EPS reduction reflecting the USD46bn of Macondo costs coupled with the
lower assumed growth rate and the WACC increase, lead to a DCF and hence target
price cut of c. 35%, from 690 pence per share to 450 pence. This represents a decline in
value of USD67bn which reflects both the Macondo costs, the lower EPS (due to asset
disposals) as well as the higher cost of capital used to discount cash flows.
At the new TP of 450 pence as shown below, and assuming all stocks at their
respective target prices, BP would trade at a 2011e EV/DACF of 7.3x, representing a
small, 3% premium to the sector, compared with its historical 10 year average 22%
premium. Moreover, the implied 4.2% 2011 dividend yield would represent a deeper
7% discount versus the sector, compared with a historical 2% discount. In our view,
these levels are sensible as a reflection of the value impairment suffered by BP and its
now uncertain outlook and direction. We think restoring credibility after Macondo will
take time and until then, the stock has no reason to revert to its historical premium
multiple.
Figure 11: BP at target price: 2011e EV/DACF and Yield vs sector & history
EV/DACF 2011e
BP at TP 7.3
Sector (at TP) 7.1
BP vs sector at TP (%) 3.0
BP vs sector 1999-2009 actual (%) 22.0
Dividend yield 2011e

BP at TP (%) 4.2
Sector at TP (%) 4.5
BP yield vs sector at TP (%) (7.0)
BP vs sector yield 1999-2009 actual (%) (2.0)
Valuation sensitivity to Macondo cost scenarios

We have flexed the BP DCF based target price to the three cost scenarios as seen.
The high cost case of USD51.5bn lowers the fair value to 430 pence per share, still
representing 26% upside from present levels. It seems to us that the risk/reward is
positive, even to a scenario of being late in plugging the well, of being negligent and
hence paying for 100% of all costs and a USD16bn fine. We would highlight that due to
lack of legal clarity, the issue of whether punitive damages would apply remains
unresolved, and hence our numbers exclude that type of cost also on the basis that
the NPV of any such damages would be mitigated by the likelihood of BP ending up in
the US courts for years.
10 BP
Figure 12: BP Macondo well costs - three cost scenarios (2010-14 aggregates)
Cost scenarios Low Base High
Total Macondo costs USDbn (pre tax) 21.0 46.8 51.5
BP DCF pence per share 550 450 430
Risk/reward appears positive

Macondo has devastated BP, and will force unforeseen changes in strategy, asset
portfolio, growth investments and management. Nothing in the previous BP world
appears valid post Macondo. Once the well is plugged liabilities can at least begin to be
estimated with some accuracy, which should enable BP to begin to redefine strategy,
direction and objectives - and at some point to also reintroduce a dividend. We expect
the stock will remain volatile and we know the market tends to over-react. The 40%
upside to our new target price of 450 pence, although not associated with a dividend
this year, is material and is based on a harsh but realistic view of the potential Macondo
liabilities.
Fundamentally, we prefer Shell and Total for similar upside and a safer dividend, plus
absence of a crisis but if we owned BP, we would not sell it at this level and might be
tempted to buy it, for both (a) the 40% upside; (b) for the possibility of a somewhat
better scenario, of a speedier plugging of the well by end July/early August and (c) the
fact that even with a more bearish view of costs, the stock offers upside of c.26%,
indicating that risk reward is not negative and could be positive though we recognise
the uncertainties.
The one reason we find it hard to become excited about at this stage is the M&A angle
- we are unconvinced that BPs larger peers would wish to step in to the middle of an
unknown environmental liability. Even when the leak stops, we are unconvinced that its
peers would wish to do anything other than cherry pick BPs assets. Of course with
M&A you can never say never though we would highlight that Exxon has (a) never
actually acquired anything very large for cash and (b) it has never bought anything
large in a hostile situation - it has always bought for shares and in an agreed offer.
Early on in this incident, it appeared this was an accident which could have happened
to anyone and its severity was not fully grasped given high expectations that the top
kill, the cofferdam, or the junk shot would stop the leak. With all attempts having failed
and in light of the evidence so far, we are unclear as to whether this is the case and as
to how water tight BPs position is. We do not wish to speculate unnecessarily on these
causes but we can only observe the reality: Macondo has created severe and
unprecedented distress both to BPs equity and bonds. Share price volatility is up, BPs
bonds trade at 85% of face value, yielding around 8% and its CDS spreads have gone
to 500-600bp.
The concern in both markets is that BPs Macondo related liabilities might overwhelm
the companys cash generation and available liquidity, at least near term, forcing some
potentially dilutive capital raising exercise, or bringing in a strategic investor on
preferential terms not necessarily available to all. Moreover; it appears that BP plc may
spend the next few years funding the liabilities of BP North America which is why Mr
Obama wants BP to remain a strong, viable company so he can potentially use it as a
cash cow. This might necessitate some form of corporate restructuring to protect the
plc itself - perhaps ring fencing BP North America at some point, selling it or parts of it.
But it seems to us that at around the recent low point of under 320 pence, the stock is
already discounting these concerns.
11 BP
The brutal truth is that the size of BPs Macondo related liabilities is unknown, due to
three key issues:
1) The precise causes of the accident have not been established as yet so we
cannot know who is liable for which error, and hence who is liable to pay what. Was BP
simply negligent, or criminally negligent and will the latter, if proved - mean it picks up
100% of all costs, rather than its 65% share of the licence? Whilst BP was very quick to
blame Transocean for their processes and faulty equipment, actually some of the
evidence released since, indicates that view was premature and possibly wrong. Whilst
the BoP (blowout preventer) indeed failed to work, equally errors appear to have been
committed by BP personnel itself in the final stages of the well completion. We
recognise that evidence such as leaked emails may have been taken out of context,
nevertheless we note with concern the 5 BP technical choices made in relation to the
completion of the doomed well, which the US Senate has highlighted as not
representing best practice. This is why we assume that BP may be proven negligent
and hence that it will pay 100% of the well and clean up costs as well as the fines and
claims for economic damages.
2) The well is still leaking: the oil industry itself admits it has no prior experience of
how to deal with an ultra deep offshore, HPHT (high pressure, high temperature) well
blow out, and by every major oil companys admission, it is unprepared and incapable
of dealing with this. Put simply, with all the help BP is receiving from the best engineers
and scientists industry and academia has to offer, no one can stop the well until the
relief wells are completed and there is still a small probability of failure, hence the
precaution of drilling two relief wells. Since end May, BP moved away from trying to
stop the leak by intervening at the wellhead, to simply capturing as much oil as possible
at the surface possibly due to concerns that the integrity of the casing is
compromised, and that further pressure from the top might lead to different problems.
The company is now focused on completing the relief wells over the next few weeks.
But until the leak actually stops, the amount of leaked oil, hence the damage it will
cause to businesses and the environment and the fines imposed by US law cannot be
accurately assessed. This is why we have conservatively assumed that BP needs to
carry on with the effort until end August or even into September our assumed clean
up cost captures the late case.
3) Capturing political risk: the situation is politically charged, since this is an election
period in the US - leading to a certain degree of hysteria, not just in the press but also
in the political establishment. This culminated with the US government imposing a six
month moratorium on offshore drilling whilst suggesting that BP should pay for the
resulting unemployed workers - and BP has had to create a USD100m fund for that. So
far whatever the US asked for, the US got.
Investors typically rely on the comfort provided by historical precedent if the future looks a
bit like the past, then we can pretend to know what the future may look like - but it is difficult
to put a value to political risk in a situation such as this, because there is no real precedent.
We genuinely did not expect that BP would suspend dividends for three quarters it
appeared that it could afford to pay them, so was the suspension really due to the political
pressure in the US? Or was it a sign of real distress and need to preserve cash? Relying on
traditional financial analysis cash flows would give the wrong answer.
12 BP
Of course there is value in the BP business there are 4.0mboed of oil and gas
production, some 2.6mbd of oil being refined and sold, all of which generates USD30bn
of cash from operations a year; plus some USD15bn of liquidity (cash, loans, credit
lines). There are some USD200bn of assets on the balance sheet but the fact is that
markets (equity, credit or oil market) cannot value the other side of the balance sheet,
namely, the size of the spill liabilities, near and longer term direct and indirect (brand
damage, US position etc). In our view the above makes a BP investment a high risk,
potentially very volatile situation. Yes, when we assume a bearish scenario on timing,
costs and fines, we still find 40% upside, with the potential that should the well be
stopped earlier, there is more upside than that.
It is also clear that sector wide implications will be significant. The rising costs and
rising risk premium became obvious early on in this incident. It is now also clear that
industry concentration will increase when looking at the deep offshore. The deep
offshore is increasingly where the industry has to go to replace oil reserves and
generate production, as the cheap, easy OPEC oil is nationalised and thus out of
bounds.
The Macondo incident probably means that the deep offshore is largely closed to small
entities - the liability limit under US law is due to be raised from USD75m to an under
discussion USD10bn. Small entities simply cannot deal with that level of liability or with
the level of cash (over USD3.0bn since April 20th) which BP is financing. Moreover, it
has probably become uneconomic to insure against the risk of a Macondo, and of
course often small, pure exploration companies have no production at all. The model
was to acquire acreage, drill some successful wells, then farm down to companies
interested in entering. This is what Total did with its JV with Cobalt (40% Total) which
combined over 210 deepwater exploration leases in the Gulf of Mexico. We do not see
how this can be workable post Macondo.
We would expect oil sector consolidation in the deep offshore, certainly in the US Gulf
to start with - assets will change hands, smaller companies will merge or be bought and
exploration activity will concentrate amongst large entities the ones which have the
balance sheet, technology and the sheer cash generation to cope with a new Macondo.
We have already seen two mergers in oil services, Acergy/Subsea 7 and
Global/Frontier which arguably make strategic sense and are complementary, but
whose timing must be interpreted as defensive and there may be more to come.
13 BP
Figure 13: Integrated oils valuation tables
M. Cap Local Target Rating Upside PE P/NBV RoE (%)
USDm Price Price (%) 2008 2009 2010e 2011e 2008 2009 2010e 2011e 2008 2009 2010e 2011e
BP 98,139 345.50 450.00 + 30.2 7.08 10.19 10.31 -21.25 2.04 1.49 0.97 0.96 28.5 15.6 18.7 15.7
TOTAL 102,566 36.64 48.00 = 31.0 7.68 11.45 8.74 8.67 2.11 1.64 1.36 1.27 29.7 15.3 16.9 15.5
RDS A 87,259 20.07 27.76 + nm 7.34 13.94 9.02 7.93 1.60 1.15 1.09 1.01 23.4 8.3 13.7 14.6
RDS B 64,244 1,591 2,200 + 38.3 7.19 13.65 8.03 7.04 1.60 1.15 1.09 1.01 23.4 8.3 13.7 14.6
Eni 69,068 15.04 18.50 - 23.0 7.65 11.57 9.14 8.62 1.60 1.20 1.04 0.98 22.9 11.3 12.2 12.8
BG 54,632 1,061 1,400 + 32.0 11.97 15.93 14.76 13.73 3.63 2.39 2.02 1.88 34.2 16.6 14.7 14.2
Repsol 26,199 17.06 19.00 - 11.4 9.83 15.08 11.83 8.49 1.30 0.98 0.97 0.97 13.2 6.5 8.2 11.5
Statoil 62,678 126.30 145.00 - 14.8 6.76 10.52 8.93 9.22 2.28 2.08 1.79 1.63 36.4 18.5 21.1 18.5
Gearing
(ND/E) EV/EBITDA EV/DACF EV/Capem ROACE (%)
2010e 2008 2009 2010e 2011e 2008 2009 2010e 2011e 2008 2009 2010e 2011e 2008 2009 2010e 2011e
BP 33.1 4.19 5.48 4.94 8.07 6.94 6.11 8.54 6.02 1.92 1.49 1.04 1.11 22.7 12.1 14.7 12.6
TOTAL 29.7 3.67 5.21 4.16 4.33 7.78 6.97 6.78 6.75 2.04 1.60 1.33 1.25 24.2 12.3 12.4 11.6
RDS A 21.8 3.01 4.74 2.95 2.83 5.99 7.26 5.06 5.26 1.69 1.27 1.16 1.12 22.0 7.4 11.5 12.1
RDS B 21.8 3.01 4.74 2.95 2.83 5.99 7.26 5.06 5.26 1.69 1.27 1.16 1.12 22.0 7.4 11.5 12.1
Eni 43.0 3.23 3.91 3.50 3.23 5.32 6.90 4.86 4.65 1.67 1.28 1.16 1.13 16.6 8.4 8.7 9.1
BG 23.6 6.06 7.34 6.98 6.66 8.73 9.96 10.18 9.52 3.48 2.16 1.86 1.68 33.0 15.6 13.0 12.2
Repsol 59.1 4.05 5.09 4.69 4.14 6.15 5.82 4.85 5.61 1.29 1.01 1.02 1.00 11.7 5.4 7.2 8.5
Statoil 35.0 2.20 2.71 2.52 2.44 5.32 6.46 4.94 5.25 1.99 1.79 1.66 1.54 23.9 14.0 15.4 14.2
Production growth (%) Div Yield (%) Free cash flow yield (%) USD adj EPS growth (%)
2008 2009 2010e 2011e 2008 2009 2010e 2011e 2008 2009 2010e 2011e 2008 2009 2010e 2011e
BP 0.5 4.2 (2.2) (0.2) 5.5 7.0 3.9 5.4 6.5 4.7 (3.8) 11.4 43.5 (43.3) (36.3) (148.3)
TOTAL (2.1) (2.5) 3.0 (0.1) 4.8 5.7 6.3 6.5 6.0 1.5 4.5 3.8 23.9 (46.8) 16.1 0.4
RDS A (2.0) (3.3) 2.2 2.3 4.8 6.4 6.2 6.6 6.4 (2.6) 3.0 5.5 14.3 (59.1) 58.5 12.6
RDS B (2.0) (3.3) 2.2 2.3 5.2 6.5 7.0 7.6 6.4 (2.6) 3.0 5.5 14.3 (59.1) 58.5 12.6
Eni 3.5 (1.3) 1.1 1.5 6.1 6.0 6.6 6.8 4.1 (2.6) 6.1 7.2 16.0 (51.3) 10.5 5.1
BG 2.6 3.9 2.7 8.9 1.0 1.2 1.3 1.5 (1.2) (4.5) (1.9) (3.3) 61.4 (39.0) 5.7 7.5
Repsol (8.8) (4.6) (1.7) (2.7) 5.0 5.3 5.0 5.5 6.8 (9.0) 6.3 1.7 4.4 (53.0) 42.5 29.6
Statoil 0.6 5.0 (1.4) 4.5 4.7 4.6 5.0 5.2 2.6 (0.4) 4.0 2.8 82.4 (51.2) 22.4 (3.4)
14 BP
Equity & Bond markets - signals of distress
The behaviour of BPs equity and bonds is that of a distressed entity. BP was the best
performing oil large cap last year. Since the accident, it is the worst, as shown below.
Figure 14: Share price changes (USD) since Macondo accident integrateds and oil services
Integrateds USD share price change since April 20th Oil Services USD share price change since April 20th
Oil Price Bourbon

Conocophillips Oil Price
BG Group DJ Stoxx 600
ChevronTexaco Saipem
Royal Dutch Shell (A)
Acergy
Exxon Mobil
Subsea 7
Royal Dutch Shell (B)
Noble Corp.
Repsol YPF
Cameron
DJ Stoxx 600
Technip
Statoil
Pride International
Eni
TOTAL Diamond Offshore
Anadarko CGG Veritas

BP Transocean
(60%) (50%) (40%) (30%) (20%) (10%) 0% (60%) (50%) (40%) (30%) (20%) (10%) 0%
Source: Chart = US and EU majors % change since April 20, also market & sector & oil price
Historically BP has been one of the most stable from a credit perspective. Yet, the
uncertainty surrounding the ultimate cost of Macondo coupled with the mid-June six
notch downgrade by Fitch to BBB (from AA) has seen BPs CDS spreads exploding
and this mirrors the collapse in its share price, as shown below.
Figure 15: BP share price and CDS spreads (
700 0
600 100
200
500
300
400
400
300
500
200 600
100 700
May 10
Mar 10
Jul 09
Feb 10
Jul 10
Sep 09
Oct 09
Nov 09
Dec 09
Aug 09
Jan 10
Apr 10
Jun 10
BP (p/share left axis) BP 5YR CDS PREM. (right axis)
Source: Datastream, Exane BNP Paribas
15 BP
As seen below, BPs existing bonds currently trade at less than 85% of face value, with
their yield to redemption having moved from 2-4% pre crisis to an astonishing near
11% at one point.
Figure 16: BP Bonds price and yield to redemption for five maturities
Bond prices Yield to redemption
110.0 12.0
105.0 10.0
8.0
100.0
6.0
95.0
4.0
90.0
2.0
85.0
0.0
80.0
Mar 10
May 10
Jul 09
Aug 09
Sep 09
Oct 09
Oct 09
Nov 09
Dec 09
Jan 10
Feb 10
Apr 10
Jun 10
May 10
Mar 10
Oct 09
Oct 09
Nov 09
Dec 09
Feb 10
Apr 10
Jul 09
Aug 09
Sep 09
Jan 10
Jun 10
3.875% Mar 2015 3.625% May 2014

2015 2014 2013 3.75% Jun 2013 3.125% Mar 2012
2012 2011 2.375% Dec 2011
Counterparty risk has sharply increased - with a 35-40% probability of default priced in
by derivative markets. Whether an investor believes this is realistic is irrelevant. What is
relevant is the consequence of the CDS spread explosion: BP has to put up more cash
collateral in its multiple day to day transactions, which increases working capital
requirements. The press (Reuters and CNBC) has reported that Credit Suisse has
lowered by 67% the threshold above which BP needs to post collateral for a trade to
USD10m from the previous level of USD30m. BP is one of the biggest energy traders
globally, if not the biggest energy trader. We also note Reuters reports that the New
York Fed has been checking banks and other firms' exposure to the company, to gauge
the risks to the financial system of a distressed BP. It has further been reported that
having examined documents and questioned banks about their exposure to BP over
the past two weeks, the Fed has found no systemic risk and had not, therefore, asked
firms to alter their credit relationships with BP.
Of course the nature of these things as we have seen during the banking crisis is that
they can lead to a self-fulfilling prophecy, it is unlikely that the Fed would actually say in
public that banks do need to ask for more collateral. It should also be highlighted that
more bets have been placed on the price of BP's bonds falling than for any other issuer
of investment-grade debt in the US as concerns have mounted over the impact of the
Gulf of Mexico oil spill on the company. Data Explorers indicate that around 24% of one
of BP's biggest bond issues has been borrowed to facilitate "short" trades. Moreover, it
said borrowing of BP shares had contracted from just below 2 per cent to 1.3 per cent of
its shares in issue for the UK listing in mid-June.
The company has argued all along that it has sufficient liquidity with USD5bn of cash,
and some USD10bn of bank credit lines (apparently without any conditions relating to
credit ratings) - on top of the USD30-35bnpa of cash generated from operations and a
low, 19% gearing at end March 2010.
So are the markets right? Is BP distressed? We set out to examine under scenario
analysis the likely size of costs and liabilities, in order to determine how BPs financials
and equity valuation would look.
16 BP
Identifying the costs
There are various costs related to the Macondo oil spill and we have analysed them
under five broad categories:
1) Costs of controlling the well and containing the leak: such costs include the
initial attempts at stopping the leak (cofferdam, top kill, junk shot etc); the drilling of two
relief wells underway since May 2, to cement Macondo and stop the leak; and
intervention systems to capture some of the leaking oil. Since the well blow out on April
20th, BP has incurred USD570m of such costs, or some USD8.2m per day. Drilling the
two relief wells alone would cost c. USD200m over three months.
2) Cleaning costs on the waters surface and on the coasts affected clearly a function
of the quantity of the leaked oil and hence area impacted. To date BP has paid USD1.92bn
in this category, including donations made directly to the affected states.
3) Claims for lost business due to the leak (fishing, tourism etc): by the end of June,
BP had paid an aggregate of USD128m for claims, averaging c. USD3,100 per claim.
The company has agreed with the US government to set up an escrow account into
which it will pay USD20 billion (at the rate of c. USD5.0bn pa) to be fully funded by end
2013. This, however, is not a ceiling, creating the risk of further cash requirements
beyond this amount. The appointment of an independent claims controller is meant to
ensure that only those directly impacted by the leak will be. BP has further agreed to
backed up by USD20bn worth of BP assets in the US, over which the company retails
ownership and control of cash flows.
4) Fines: under the clean Water Act BP and its partners will be fined an amount per
barrel of leaked oil, net of barrels captured by BP. The range of fines is from a low of
USD1,100 per net leaked barrel to a high of USD4,300/bbl should criminal negligence
be proved.
5) Punitive damages: legal precedent is unclear as to whether a spill can be subject
to both the Oil Pollution Act of 1990 as well as to punitive damages. One legal opinion
is that the Oil Pollution Act precludes punitive damages awarded in oil spill cases.
However, we note on the negative side that the US legal system itself appears to be in
a state of flux with proposals to change laws and to apply the new ones retroactively.
On the more positive side, in the case of Exxon Valdez, the initial USD5.0 of damages
awarded against Exxon in 1994 (which the company never recognised as a legitimate
liability in its accounts) was reduced to just USD508m by 2008 - Exxon was not found
criminally negligent.
The other issue concerns cost apportionment: to date, BP has been financing 100% of
all costs incurred, and has said that it has not as yet issued any invoices to its partners
in the licence, Anadarko (25%) and Mitsui (10%). Excluding fines/damages, the first
three cost categories listed above (well containment/control and clean up) since April
20th have amounted to USD2.65bn, as seen below. The amount of claims has so far
been relatively small with the bulk of the costs being the spill response (USD1.27bn)
and the well control/containment.
17 BP
Figure 17: BP Macondo: well containment & spill clean up April 20-June 28
Well control costs USDm
Relief wells 140
Source control 430
Sub total well control 570
Cleaning costs
Spill response 1270
Federal spill response 330
State parish support 320
Sub total cleaning 1920
Other costs
Claims 160
Aggregate cost incurred 2650
Note: costs shown on a 100% basis. BPs interest in the license is 65%
Source: BP, Exane BNPP
According to the terms of the licence, BP would at some point invoice its partners (Anadarko
and Mitsui) with 35% of such costs, leaving its share at the 65% stake it owns in the
exploration block. According to BP some US state invoices for spill clean up costs have
been issued in the name of all 3 partners and clearly it will be impossible for Anadarko and
Mitsui to refuse to pay the US government, in our view. However it is impossible to gauge
how much of the clean up costs are directly incurred by the states as opposed to BP.
Whether the other two partners will ultimately pay their share of costs currently paid by
BP itself, remains totally unclear. Anadarkos CEO has already publicly stated that it was
BPs gross negligence in drilling Macondo which caused the blow out, and that this
represents a breach of contract - meaning that BP should incur all costs. The companies
are as a result involved in arbitration to resolve the issue. However, the ultimate answer
on this will have to wait for the outcome of the various formal investigations carried out
and ultimately, should disagreements arise, on what could be prolonged litigation.
For the purposes of our analysis, we assume that BP will incur 100% of the estimated
costs. We also note the sharp acceleration of daily costs between June 17-28 as
shown below. Clearly costs will not be linear and BP is going through a period of
intense effort as it is in the process of increasing its capacity to capture leaked barrels
at the surface. Currently two containment systems are in operation, capturing around
25,000bd of oil the actual amount leaking has not as yet been precisely defined, but
has been said to be up to 60,000bd. BPs third containment system targets an increase
in the amount of barrels captured towards 40-53,000bd with a further increase planned
in July towards 80,000bd creating the obvious question: is the leak as high as 80,000
bd or more? The third containment system is due to be operational within the next
week and its installation has clearly boosted costs.
Figure 18: Daily costs incurred: sharp 22% acceleration in 10 days

Well control costs USD/day average USD/day average Daily cost average
April 20-June 17 (57 days) April 20-June 28 (69 days) June 17-28 (11 days)
Relief wells 1.75 2.0 3.6
Source control 5.26 6.2 11.8
7.02 8.3 15.5
Cleaning costs
Spill response 14.04 18.4 42.7
Federal spill response 3.51 4.8 11.8
State parish support 2.98 4.6 13.6
20.53 27.8 68.2
Other costs
Claims 1.75 2.3 5.5
Other, non clean up costs 2.28 0.0 NM
4.04 2.3 NM
Aggregate cost per day 31.58 38.4 77.3
Note: Costs shown on a 100% basis. BPs interest in the license is 65%
Source: BP, Exane BNP Paribas estimates
18 BP
Counting the costs scenarios
Costs of stopping the leak and clean up

Following the Exxon Valdez accident, the OPA was passed in 1990, which specifies
that the direct costs of plugging the leaking well and cleaning up the pollution must be
borne by the licence holders, BP (65%), Anadarko (25%) and Mitsui. However, with BP
as the operator, should the partners sue BP for negligence and succeed, then 100% of
such costs would be borne by the company.
Well containment and clean up costs: for the first two categories of costs, well
containment and leak control costs, we have divided costs in two time frames those
incurred until the well is plugged; and the subsequent clean up costs for the shore. As
seen in the earlier table, the average daily cost to end June of the well
control/containment and spill response/cleanup has been USD36m (this excludes claims).
We assume daily costs until the well is stopped will rise by a further 40% to
USD51m/day and we run three timing scenarios: these are that the leak will be stopped
early (by August 2, which is 3 months from the start of the first relief well); our base
case which assumes an end August end to the leak (capturing any hurricane related
delays) and finally a worst case where BPs two relief wells encounter problems, and
need to keep retrying until the end of September.
Previous incidents of well blow outs are rare and old (such as IXTOC) so their
precedent of multiple relief wells required before the leak was stopped may be
redundant in light of improved technology. Other companies such as Shell believe that
technically this is the only way to do it and that the probability of failure is fairly low
but investors should be prepared, we think, for more than one attempt.
Figure 19: Well containment & clean up costs until leak is stopped
Well & Clean up costs Cost per day
Date Days remaining (USDm) (USDm)
Leak stopped early 02-Aug 35 4,258 51
Base case 31-Aug 64 5,723 51
Leak stopped late 30-Sep 94 7,239 51
Note: amounts include the USD2.49bn already spent

When the leak is finally stopped - a key catalyst obviously - there will obviously be no
more relief drilling or containment costs, and the effort will then shift to the clean up. The
US coast guard has said this could be completed within a couple of months we interpret
that to mean that the bulk of the oil can be cleaned from the shore within that time frame.
We presume the effort will continue for much longer though clearly at a much reduced
intensity. Hence, we run three scenarios, with the clean up costs presumed to be more or
less complete within two, three and six months, as seen below.
Figure 20: Clean up costs from when the well is plugged & drilling stops
Cost per day assumed@ USD39m Days for clean up Cost USDm
Leak stopped early 60 2,337
Base case 90 3,506
Leak stopped late 180 7,012
19 BP
Aggregating the costs pre and post leakage-stop in the next table, indicates our central case
at USD9.2bn - of which BPs 65% share should be USD6.0bn. In fact we have decided to
assume in our BP financials that the company pays USD9.2bn itself for both the well
containment and clean up in the period Q2-Q4 2010. It presumes that neither Anadarko not
Mitsui (nor indeed Transocean or Halliburton) will pay anything towards such costs. For the
purposes of the P&L we have assumed a further USD1.0bn in 2011, followed by USD250m
in 2012.
Figure 21: Well containment and clean up cost aggregates USDm

100% of costs From when leak & drilling stop: time to cleanup
Date when leak stops Days for clean up
Date Days 60 90 180
02-Aug 35 6,596 7,764 11,270
31-Aug 64 8,061 9,229 12,736
30-Sep 94 9,576 10,745 14,251
For comparison, the Exxon Valdez costs are shown below the clean up costs
amounted to USD2.2bn over four years (1989-92) which in todays money would be the
equivalent of USD3.5bn, though of course for a much lower volume of leaked oil.
Figure 22: Exxon Valdez

Item (money of the day) Year Damages USDm Court
Estimated economic losses of the c.32,000 plaintiffs 1994-2008 500 Alaska federal jury
Punitive damages initial award 1994 5,000 Alaska federal jury

Reduced to 2002 4,000 9th US Circuit court of Appeal
Reduced to 2006 2,500 9th US Circuit court of Appeal
Reduced to 2008 508 US Supreme Court
Current punitive damages 508
Immediate compensation paid 300
Clean-up (1989-1992) 2,200
Estimated cost of environmental damage 0
Total 3,008
Total in 2010 money 5014
20 BP
Fines
We estimate that on a net basis that is once we deduct the barrels captured by BP -
between 405,000 and 2 million net barrels of oil have so far been released into the Gulf
of Mexico, which have damaged coastlines and marine ecosystems. Consequently, we
fully anticipate that BP will be subject to fines, just as Exxon was following the Exxon
Valdez incident. The main one arises from the Clean Water Act, though others will no
doubt be brought in such the Refuse Act and the Migratory Bird Treaty Act, although
the latter two should be immaterial in the context of the overall cost of the spill.
Fines under the Clean Water Act

The Clean Water Act was introduced in the US in 1972 and is the key federal law governing
water pollution. It imposes on companies which discharge oil into US waters penalties of up
to USD1,100 per barrel. However, should the spill have been caused by BPs gross
negligence or wilful misconduct, then this limit is raised to USD4,300 per barrel.
There is a great deal of uncertainty regarding the precise rate at which Macondo has
been flowing. In the first couple of days after the April 20th explosion and while the rig
was still burning, no oil was seen escaping. After the rig sank it became clear there was
a leak, but as there was no way of measuring the flow, and an early BP estimate stood
at just 1,000bd.
By April 28th, despite the lack of measuring sensors, US government scientists were
estimating a flow rate of five times greater at 5,000bd, effectively corresponding to an
Exxon Valdez size spill every two months. BPs final big attempt to stop the leak from
the wellhead came on May 26th, when the top kill procedure and the junk shot were
both tried and failed. On June 3rd following the failure of the top kill BP cut a riser
pipe in order to install a containment system, and at that time it also installed sensors,
enabling measurement of the flow.
At that stage BP fitted the first containment cap to the top of the BoP to collect some
15,000bd but by that stage government scientists had raised their estimates to a flow
rate of 20,000-40,000bd. By June 16th a federal team of scientists and engineers
updated their estimate of the flow rate, putting it at a range of 35,000-60,000 bd of
which BP is collecting c. 25,000bd, due to rise towards 40-50,000bd of collection
capacity by mid July.
Thus by early July BPs oil spill officially became the worlds biggest offshore spill
disaster. The most pessimistic of US government estimates suggest that, excluding the
oil captured by BP, the high end of the spill could be up to 199 million gallons so far
(4.7mbbl) which corresponds to the 60,000bd high end of the estimates, but applied
from day 1 of the accident, which is clearly not correct the flow rate was constrained
by the BoP until BP severed the riser in June.
The fine depends on the size of the leak but the size of the leak is not straightforward
and is certainly a lot more complicated than having the same daily flow rate from the
initial accident date. We have assumed a daily flow rate between the start of the leak
on April 20th and early June (when the riser was cut to allow installation of BPs capture
system) gradually rising from 5,000bd (the initial US estimates) to 20,000bd, and then
we assume that the flow rate increased post the severed riser in early June to the
range currently mentioned of 35-60,000bd. Hence our calculations indicate total volume
leaked to date of between 37m and 104 million gallons. Deducting the oil captured by
BP, the net volume of the leak is in the range of 17-84 million gallons well below the
US government estimates.
21 BP
Figure 23: Macondo total oil recovered
Then we run three plausible scenarios for the future leak, that is, from now and until
the well is cemented. These clearly depend purely on time (days) and flow rate. As
seen below, we define the early stop case as running until August 2 (exactly 3 months
from the start of drilling the first relief well); the base case is defined as end August,
which allows for hurricane disruptions; and a late case assumes that the first relief does
not succeed, necessitating completion of the second relief well, assumed to
successfully stop Macondo by end September.
Figure 24: Scenarios for net barrels leaked (total leak less captured by BP)
000 bbl Date Low leak estimate Medium estimate High estimate
To date 20-Apr to June 28 405 775 1,998
From June 29 until well plugged Date leak stopped
Leak stopped early 02-Aug 157 500 842
Base case 31-Aug 157 717 1,277
Leak stopped late 30-Sep 157 942 1,727
Total net leak Days of leak Low leak estimate Medium estimate High estimate
Leak stopped early 105 562 1,275 2,840
Base case 134 562 1,492 3,275
Leak stopped late 164 562 1,717 3,725
Source: Exane BNP Paribas estimates. Note: leak rates from 35-60,000 bd
Assuming that BP did not act with gross negligence or wilful misconduct, therefore fines
would be up to USD1,100 per barrel. We assume that the fine would be the maximum
USD1,100 per barrel.
Figure 25: Fines under Clean Water Act - no negligence assumed (100% of fine)
USDm 100% of fine Low leak estimate Medium leak estimate High leak estimate
Leak stopped early 619 1,402 3,125
Base case 619 1,642 3,603
Leak stopped late 619 1,889 4,098
22 BP
BP would only pay its 65% share and therefore, under our base case/medium leak
estimate, we would expect BP to be fined USD1.1 billion under the Clean Water Act.
However, to the extent that there appears to be some evidence, as outlined earlier that
BP may have acted negligently in the run up to the incident, it might end up liable to the
USD4,300 per barrel penalty. Whilst we cannot assess nor comment on the likelihood
of such an outcome until the full facts of the investigation are released, we outline
below the potential penalties for reference, applying the maximum fine of USD4,300
per barrel under the base case timing and high leak estimate, 100% of the fine could
amount to USD16bn.
Figure 26: Fines under Clean Water Act - with gross negligence (100% of fine)
USDm 100% of fine Low leak estimate Medium leak estimate High leak estimate
Leak stopped early 2,419 5,482 12,214
Base case 2,419 6,418 14,085
Leak stopped late 2,419 7,385 16,020
Figure 27: Clean Water Act - no negligence: BP's 65% share of fines
USDm Low leak estimate Medium leak estimate High leak estimate
Total fine 65% share Total fine 65% share Total fine 65% share
Leak stopped early 619 402 1,402 912 3,125 2,031
Base case 619 402 1,642 1,067 3,603 2,342
Leak stopped late 619 402 1,889 1,228 4,098 2,664
Figure 28: Clean Water Act with gross negligence: BP's share of fines
USDm Low leak estimate Medium leak estimate High leak estimate
Total fine 65% share Total fine 65% share Total fine 65% share
Leak stopped early 2,419 1,572 5,482 3,564 12,214 7,939
Base case 2,419 1,572 6,418 4,172 14,085 9,155
Leak stopped late 2,419 1,572 7,385 4,800 16,020 10,413
Note: it is unclear whether proof of negligence will invalidate BPs contract with partners Anadarko and Miitsui,
thereby obliging BP to cover 100% of the fines on its own
In the event that BP is found to have acted with gross negligence, this could indemnify
its licence partners (Anadarko, Mitsui) from sharing costs. For the purposes of our
financial projections the likely range of fines is very wide but we have assumed (a) the
high 60,000bd leak estimate; (b) USD4,300 per barrel fine, (c) 100% of the fines and
(d) the base case date for stopping the leak of end August. Thus we include in the
2010-11 P&L fines under the clean water act amounting to USD16bn.
23 BP
Claims the USD20bn escrow account might be enough
The third part of the BP bill will be compensation for lost economic activity, lost federal,
state and local taxes and environmental damage. The OPA limits this to USD75m but
BP said that it will waive the cap and honour all legitimate claims.
To prove that BP is committed to putting the Gulf right, it has agreed with the US
administration to set up a USD20 billion escrow account, which will be used to fund the
potential economic damages. BP will contribute to this claims fund gradually, starting
with USD3bn in Q3 2010, and USD2bn in Q4 of 2010, to be followed by USD5bnpa (or
USD1.25bn per quarter) from 2011 until the full USD20bn fund is fully financed by end
2013. However, the USD20bn is not a ceiling and BP could conceivably be asked,
eventually, to contribute more.
Which is how we have interpreted BPs financial response in the aftermath of the
USD20bn agreement: the company has
1) suspended the dividend for three quarters (Q1-Q3) in 2010 despite the Q1
dividend having already been approved at its AGM. Whilst suspending the dividend
was clearly politically correct in the US, the decision could not have been an easy
one. Tony Hayward has repeatedly recognised the importance of the BP dividend to
UK pension funds but the measure does save BP USD7.8bn of cash.
2) Reduced 2010-11 capital expenditure by 10%, from an annual USD20bn to
USD18bn which saves a total of USD4bn over the two years.
3) Announced accelerated asset disposals: from the previously targeted USD2-3bnpa
to USD10bn, for an incremental USD7bn more.
The above three measures save BP some USD19bn in aggregate over 2010-11, which
roughly matches the USD20bn to be paid in the escrow account by 2013.
To date BP has paid USD128 million in claims, an amount which is gaining momentum
as the spill effects unfold.
Figure 29: Claims from affected Gulf residents and businesses

Date Claims Payments
Number Number Amount average
13 May 6,700 1,000 Not available
17 May 15,000 2,600 n/a
18 May 15,600 2,700 n/a
20 May 19,000 8,000 n/a
29 May 26,000 11,650 n/a
01 June 30,000 15,000 USD40m USD2,667
07 June 37,000 18,000 USD48m USD2,667
10 June 42,000 20,000 USD53m USD2,650
14 June 51,000 26,500 USD62m USD2,340
19 June 64,000 31,000 USD104m USD3,355
21 June 65,000 32,000 USD105m USD3,281
25 June 74,000 39,000 USD126m USD3,231
28 June 80,000 41,000 USD128m USD3,122
Source: BP
We have looked at the value of the industries likely to be impacted: fishing, tourism and
other in order to gage whether the USD20bn may be adequate.
24 BP
Fishing industry
In 2008, the total fish and shellfish landings in the Gulf of Mexico amounted to
USD659m in revenues with the total Gulf Coast commercial and recreational fishing
industry being worth USD22.6 billion. Even though revenue from the sales from
commercial fishing had been falling since 2006, we assume that the 2008 sales
revenues for both commercial and recreational fishing are representative of the sales
revenues in 2010 and 2011.
Even though 65% of Gulf federal waters remain open to fishing post the spill, we
conservatively assume that 60% of the fishing industry of the three most affected states
(Alabama, Louisiana and Mississippi) will could impacted negatively, by the loss of 60%
of the business in year 1. Texas is as yet unaffected and Florida only very slightly,
therefore we conservatively assume a 1% and 5% respective negative impact to their
sales.
It should be noted that certain environmentalists consider the effects of the spill from
disrupting fishing will actually be positive, and could potentially lead to a bumper
harvest next year, due to the resilience of marine animals. Taking the case of the
Exxon Valdez accident in Alaska, we note that a 10 year study into the effects of that
spill on marine life, proved that many species showed either no impact or in fact
enjoyed a positive impact from the spill. In particular, Alaska enjoyed an all time record
pink salmon harvest from the Prince William Sound in 1990 - the year following Exxon
Valdez as shown below.
We therefore assume no lasting impact on the Gulf fishing industry. Nevertheless, we

include a 10% loss of business the second year, for the three most affected states with
no impact for Florida and Texas. Clearly any upside in revenues from a future bumper
harvest will not be reclaimed by BP but any downside would be claimed.
Figure 30: Pink salmon numbers caught from Prince William Sound (millions)
Source: Fish and Wildlife recovery following the Exxon Valdez Oil Spill, Wiens, Brannon, Burns, Day, Garshelis,
Miller, Johnson, Murphy
25 BP
Figure 31: Fishing industry claims
State Commercial fishing sales Recreational fishing sales 2010 impact 2011 impact
USDm USDm (%) USDm (%) USDm
Alabama 445 455 60 540 10 90
Louisiana 2,034 2,297 60 2,599 10 433
Mississippi 391 383 60 464 10 77
Texas 2,013 3,288 1 53 0 0
West Florida 5,657 5,650 5 565 0 0
Total 10,540 12,073 4,221 601
Source: NOAA 2008 state statistics, Exane BNP Paribas estimates
Tourism
Tourism in Louisiana, Mississippi, Alabama and Florida is estimated to be a
USDUSD60 billion industry, where Gulf coast tourism is estimated to account for
USD20 billion. However, the USD60bn also includes Texas and parts of Florida, both of
which have been relatively unaffected so far. We adjust this figure down by 20% to
exclude Texas and those sections of Florida which are unaffected; we further assume a
harsh 30% overall loss of earnings for Gulf tourism this year reducing by 10% a year
until 2012.
Figure 32: Tourism industry assumed 2010-12 loss of business and claims
USDbn 2010 2011 2012 Total
Industry value (5% growth rate) 16.0 16.8 17.6
Lost earnings (%) 30 20 10
Estimated claims 4.8 3.4 1.8 9.9
Other
People could conceivably start claiming for damage to their property, medical expenses
if they fall ill due to the oil, and for more subjective things such as estate agent lost
commission as people may not be buying coastal properties; or chartered airlines loss
of business. This is impossible to assess, other than to repeat our earlier observation:
the independent claims controller has already testified to the Senate that only those
who can prove they were directly impacted by the oil spill can claim. We have taken a
further USD1.5bn of other claims in year 1, reducing by USD500m per year going
forward to 2012. This is more a gesture of recognition on our part of this type of claim,
as opposed to a considered estimate, so we are aware that the number is effectively
arbitrary.
Figure 33: Miscellaneous claims

USDbn 2010 2011 2012 Total
Estimated claims 1.5 1.0 0.5 3.0
Total potential claims

The sum total of claims comes to USD17.7bn for 2010-12, of which BPs 65% share
would amount to USD11.5bn over three years meaning there would be USD7bn in
the escrow account for BP to claim back. However, there is a worse case scenario
which assumes gross negligence, meaning that the operating contract with BP no
longer stands, since BP would have breached the terms of this contract. As mentioned
earlier, the partners could at that point be indemnified against these costs with BP
having to pick up the entire tab.
26 BP
Figure 34: Total estimated claims
USDbn 2010 2011 2012 Total
Estimated claim 10.5 5.0 2.3 17.7
BP's 65% share 6.8 3.2 1.5 11.5
However, our better case scenario assumes a lower spill impact on coastal regions
and the fishing industry as a whole (we factor in a 50% reduction versus the base case
estimate). For the purposes of our new forecasts, we have adopted essentially a worst
case of including all the USD20bn, phased as per the agreement with the US (at
USD5npa until end 2013).
Figure 35: Scenario outcomes

USDbn 2010 2011 2012 Total
Better case (65% share and 50% lower impact) 3.4 1.6 0.7 5.8
Base case (65% share) 6.8 3.2 1.5 11.5
Worse case (100% share) 10.5 5.0 2.3 17.7
27 BP
Punitive damages impossible to quantify
The investigation into the causes of the spill has not yet been completed and therefore
it would be premature to attempt to form a view as to whether or not it is deemed that
BP acted negligently or whether punitive damages may be applicable and their
amount. Moreover, it is unclear whether the Oil Pollution Act may preclude any awards
for punitive damages; OPA provides the list of recoverable damages and one legal
view is that this list excludes punitive damages.
Numerous state and federal agencies have launched separate criminal investigations,
and clearly a guilty verdict would raise the spectrum of potential damages. However we
do not expect the full results of the investigation to be released until the well is sealed
in August according to BP - and then the BoP is recovered and examined. The
investigations underway include:
The joint investigation by the US Department of the Interior and the Department of
Homeland Security (Primary investigation)
BPs internal investigation
The US House of Representatives Subcommittee on Oversight and Investigations,
Committee on Energy and Commerce investigation
The Senate Committee on Energy and Natural Resources investigation.
We review below the type of failures relating to Macondo and currently being
investigated by BP itself and by the US congress.
Macondo the seven failures identified by BP

While it is unclear when the above mentioned investigations will publish their final
conclusions, preliminary findings are circulated periodically and evidence collated so far
suggests that the accident was caused by the failure of various mechanisms that were
designed to prevent, or at least reduce, the impact of any equipment or system
malfunction. In Tony Haywards statement to the congressional committee on the
Deepwater Horizon oil spill, he highlighted the failure of seven mechanisms:
1) The casing system, which seals the well bore;
2) The cement that seals the reservoir from the well;
3) The pressure tests to confirm the well is sealed;
4) The execution of procedures to detect and control hydrocarbons in the well,
including the use of the BoP and the maintenance of that BoP;
5) The BoP emergency disconnect system, which can be activated by pushing a
button at multiple locations on the rig;
6) The automatic closure of the BoP after its connection is lost with the rig the
dead-man switch, and;
7) Features in the BoP to allow remotely operated vehicles (ROVs) to close the BoP
and thereby seal the well at the seabed in the event of a blowout.
28 BP
We discuss briefly each of these in turn:
1) The casing system, which seals the well bore
The well head on the sea bed is located at 5,067 feet below sea level, with the well
then extending down a further 13,293 feet to the oil reservoir at 18,360 feet below sea
level. The production casing string is made up of 9 different casing sizes varying from
36 inches in diameter at the top down to 7 inches at the bottom and the resulting well
casing string resembles a telescope. Each time the casing diameter changes, the
annulus (the space between the two casings) is filled by an O shaped ring called a
liner hanger. Then a mixture of cement, water and chemicals is pumped into the space
around the outside of the casing to seal the gaps. Unfortunately, it appears that a liner
hanger was not inserted in the space between the 8th and 9th casings, which may have
allowed gas to flow into the well bore, from where it would have had a free passage to
the surface.
2) The cement that seals the reservoir from the well

A study by the Bureau of Ocean Energy Management, Regulation and Enforcement
(BOE - previously the Minerals Management Service, MMS) has found that faulty
cementing caused 18 of the 39 blowouts in the Gulf of Mexico since 1992. As explained
in further detail at subsection 3 below, there were anomalies in the negative pressure
test results of the Macondo well, which suggested that there might have been a breach
in the cement or the casing that could have allowed a flow of hydrocarbons into the
well. It is worth noting that the cement is used only at specific points in the well and not
throughout the well bore.
3) The pressure tests to confirm the well is sealed

There are two types of pressure tests: a positive pressure test which involves pumping
fluid down the well to increase the pressure In order to check whether this could lead to
fluids flowing from the well into the surrounding formations. A negative pressure test
involves removing the drilling fluid, allowing the hydrocarbons to flow up the well to
establish whether pressure arises from any location other than the well bore. It is worth
noting that the MMS only require a positive pressure test to be undertaken to test the
well integrity; but BP performed both positive and negative pressure tests.
The well passed the positive pressure tests on the morning of 20 April, but there were
anomalies in the results of the negative pressure tests performed later that afternoon.
There were pressure differentials within the well bore, which suggested a possible well
failure, with gas flowing up the wall of the well. This indicated that further tests should
have been undertaken. However, it is claimed that BP proceeded with drilling the well
anyway based on those preliminary results. Schlumberger had a cement bond log test
crew on site, but their services were not used by BP.
4) The execution of procedures to detect and control hydrocarbons in the well,

including the use of the BoP and the maintenance of that BoP
In order to detect the presence of hydrocarbons, the recommendation of the American
Petroleum Institute is to fully circulate drilling fluids (mud) in the well, from the bottom to
the top of the well before commencing the cementing process. This would have allowed
the rig crew to detect gas influxes and safely remove these pockets of gas along with
any debris before proceeding with the cementing process. While this is recommended
practise, BP decided to only perform a partial circulation of the drilling mud before
cementing the well. However, it is unclear whether this procedure is a requirement
under MMS regulation rather than best practice.
29 BP
5) The BoP emergency disconnect system (EDS)
In the event of an emergency, a BoP EDS can be triggered by pushing buttons from
various locations on a rig which sends a signal down a hard wire to the BoP.
Unfortunately, the BoP attached to the Mississippi Canyon Block 252 wellhead did not
respond to the Deepwater Horizon crew pushing the buttons and hydrocarbons kept
shooting up the well to fuel the fire and explosions on the rig. The exact reasons why
this manual shut off system failed are still unknown and we presume that they will only
be explained once the BoP has been recovered from the seabed. Having said this,
Jack Moore, CEO of Cameron International - the manufacturer of the BoP used on this
well - confirmed that if the connection between the BoP and the rig was lost, then the
EDS would be disabled. It is conceivable that the communication systems between the
BoP and the rig could have been destroyed during the explosion on the rig, before the
EDS could have been activated by the crew.
6) The automatic closure of the BoP after its connection is lost with the rig
the dead-man switch
The BoP was kept in constant contact with the rig via the hard wire attached to the
riser. In the event that the BoP loses contact with the rig, effectively meaning that the
riser parts from the wellhead, the BoP should have automatically cut off the flow of oil.
Cameron International explained that in order for the dead man switch to activate, the
power, hydraulics and communication (the riser parts from wellhead) had to fail.
Despite the catastrophe, this shut off mechanism also failed. It is considered a
possibility that the reason that the dead man switch did not activate was because the
riser was still connected to the BoP and the rig for two days following the incident,
therefore the hydraulic line was intact.
7) Features in the BoP to allow remotely operated vehicles (ROVs) to close the
BoP and thereby seal the well at the seabed in the event of a blowout
Nevertheless, even once the BoPs manual shut off from the rig or the dead man switch
failed, as a last resort BP should have been able to activate the BoP using its
submersible ROVs. Unfortunately again, here this procedure did not work. Norway and
Brazil enforce an additional safety measure acoustic activation of the BoP. A ship or
ROV would send a signal to the BoP which should trigger it to cut the oil flow, but it is
unclear whether this method would have worked in this case.
The five BP decisions questioned by Congress

US Congress, via the Committee on Energy and Commerce, is itself investigating the
incident and has reviewed some 30,000 documents. According to the June 14th letter to
BPs CEO by Committee chairman, Henry Waxman, the well was well behind schedule
creating pressure on personnel to take shortcuts. BP appears to have made five
crucial decisions on Macondo, some of which may violate industry guidelines. The
committee believes that these decisions appear to have been made for economic
reasons, whilst increasing the risks of a well failure.
1) Well Design: in installing the final section of steel tubing in the well, BP had two
options, and according to Mr Waxman, appears to have used the one involving less time
and expense - but also the one providing fewer barriers to gas flow: a full string of casing
instead of a liner and tieback. A BP plan review prepared in mid April recommended
against the full string of casing - the very option that BP in the end chose.
30 BP
2) Centralizers: a key challenge in completing the well was to ensure the casing ran
down the centre of the wellbore, otherwise as the APIs recommended practices explain,
it is difficult if not impossible to complete the cementing of the well. Halliburton was hired
by BP to cement the well and they warned BP that the well could have a severe gas flow
problem if BP were to lower the final string of casing with only 6 centralizers instead of the
21 recommended by Halliburton. A BP official appears to have rejected use of 21
centralizers as this would have taken an extra 10 hours to install.
3) Cement Bond Log: BPs mid April well plan review predicted cement failure.
Halliburton predicted severe gas flow problems. Yet BP personnel decided not to run a
9-12 hour procedure the cement bond log enabling assessment of the integrity of
the cement seal. A Schlumberger crew was on the rig on the morning of April 20th to
run a cement bond log but they left before carrying out the procedure as BP told them
their services were not required.
4) Mud circulation: the API recommends that oil companies fully circulate drilling
mud in an exploratory well from the bottom to the top before the cementing process.
Circulating the mud at Macondo would allow testing of the mud for gas influx, to safely
remove any gas pockets and eliminate debris so as to prevent contamination of the
cement. But the process would have taken up to 12 hours and BP decided to forego
this safety step and to conduct only a partial circulation of the drilling mud before the
cementing.
5) Lockdown Sleeve: BP decided not to install a piece of apparatus which locks the
wellhead and casing at the seafloor, thus minimizing the opportunity for hydrocarbons
to break through the wellhead seal and enter the riser to the surface.
Peer group views and some conclusions

We note the comments made in front of the Senate and under oath by the CEOs of
Exxon, Chevron, ConocoPhillips and the Upstream MD of Shell, that the tragedy was
preventable. Most accidents can be argued with hindsight to have been preventable,
so to us such statements mean very little until we have a clear, official conclusion in the
causes. The CEO of Anadarko, BPs Macondo prospect partner, has perhaps
predictably gone further by contesting that this tragedy was preventable and was the
direct result of BPs reckless decisions and actions. Again it is natural for Anadarko to
contest having to share 25% of a huge cost burden, in view of its size and the fact that
its credit rating has been downgraded to junk status.
However, we remain cognisant of the fact that, on first impressions, the BP case itself
is far from water-tight. What is of relevance here are the questions raised by the US
Senate on BPs five questionable decisions regarding the well; and the comments from
its peer group CEOs, to the effect that their companies would have designed and drilled
the well differently.
To the outsider it now appears that the Macondo well design, whilst widely used by BP
itself in the Gulf of Mexico and approved by the US authorities (MMS) for years, may
not in fact represent the global well design standard that its peer group apparently use
for deepwater reservoirs. Additionally, various BP employee emails show that decisions
were taken to apparently go against recommendations by, amongst others, Halliburton
in the final stages of the well completion and just hours before the explosion. If this was
the well from hell, why would not the BP employees in charge ensure absolute best
practice to prevent complications? Was there a BP-process in place to define best
practice and to enforce it?
31 BP
BPs Tony Hayward has said in his recent testimony that the various problems
encountered at Macondo and the decisions made to cope with them, never actually
reached top management. But surely, assuming always that BP with its supposed
laser focus on safety post 2007 - has a strict and clearly defined process in place on
exactly how an ultra deepwater, HTHP well is to be drilled (as opposed to allowing
individual well managers the freedom to decide on what appear to have been very last
minute changes at Macondo) then any divergence from that standard practice should
have found its way up the management ladder, and if it contravened company policy,
should have been stopped.
Shells Mr Vosser has recently said that this would be the case at his company - any
major change to the standard Shell well design could ultimately reach him personally
for approval, if not stopped by managers further down the ladder. So why was BPs top
management not made aware of the issues with a persistently difficult well, is a
question that investors will eventually need an answer to.
BPs top management has provided us in recent years with metrics indicating
continuous improvements of safety in their Gulf of Mexico upstream operations. Clearly
something went horribly wrong with Macondo. Human error is a risk that no top
management, in any industry, can guard against which is precisely why
managements role is to define the exact process relevant to each operational situation,
which has to be followed by all employees in order to minimise such risks. In our view,
investors need to understand whether and how the BP process may differ from industry
best practice. Texas City was an accident caused by poor process safety; if Macondo
falls in the same category, then BP is in for a truly prolonged and painful overhaul, top
to bottom, which will take a very long time to implement - and an even longer time to
convince the external world that it is finally working.
32 BP
Figure 36: BP Income statement
Macro Environment 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e
Brent (USD/bbl) 65.1 72.5 97.1 61.6 73.7 70.0 70.0 70.0 70.0
US Henry Hub gas price (USD/mmBtu) 6.91 6.86 9.04 3.99 4.62 5.00 6.04 6.59 6.59
BP global refining margin 8.56 9.97 6.51 4.00 4.68 7.15 7.99 8.14 8.24
GBP/USD average 1.84 2.00 1.85 1.57 1.51 1.50 1.50 1.50 1.50
EUR/USD average 1.26 1.37 1.47 1.39 1.32 1.33 1.32 1.33 1.32
Oil & Gas Production (kboe/d) 3,926 3,818 3,837 3,998 3,910 3,902 3,998 4,054 4,073
BP ex Russia 2,956 2,907 2,914 3,054 2,959 2,933 3,012 3,050 3,050
Production growth (2.2%) (2.8%) 0.5% 4.2% (2.2%) (0.2%) 2.5% 1.40% 0.46%
Refinery Throughput (kb/d) 2,198 2,127 2,156 2,287 2,408 2,482 2,514 2,564 2,549
Marketing Sales (kb/d) 3,873 3,806 3,711 3,559 3,540 3,564 3,591 3,620 3,648
Income Statement (repl.cost, adjusted) USDm 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e
Sales revenues 265,906 284,365 356,586 227,098 271,522 253,557 262,039 271,283 277,443
Earnings from associates, JVs (post tax) 3,995 3,832 3,821 3,901 4,144 3,068 3,186 3,198 3,274
Interest and other income 701 754 736 792 567 526 684 766 865
BP total revenue 270,602 288,951 361,143 231,791 271,522 253,557 262,039 271,283 277,443
EBITDA (RC adjusted) 42,256 40,405 53,759 34,778 28,749 17,357 37,259 39,357 44,950
Operating profit (Repl.cost, adjusted)
Exploration & Production 28,495 27,063 39,580 21,616 27683 22802 24163 25412 25220
- Macondo:well containment & clean up costs (9223) (1100) (250) (200) 0
- Macondo cash into USD20bn claim fund (5000) (5000) (5000) (5000) 0
- Macondo Clean Water Act fines 0 (16000) 0 0 0
Refining & Marketing 5,337 3,930 3,318 3,607 3707 4748 5937 6156 6134
Other businesses & corporate (769) (947) (590) (1,834) (1410) (1600) (1600) (1600) (1600)
Consolidation adjustments 65 (220) 466 (717) 351 0 0 0 0
RC profit before interest & tax 33,128 29,826 42,774 22,672 16,109 3,849 23,250 24,769 29,754
Gross interest expense (718) (1,318) (1,547) (1,110) (952) (1068) (889) (700) (459)
Other finance (income)/expense 202 577 591 (192) (155) (220) (220) (220) (220)
RC pre tax profit 32,612 29,085 41,818 21,370 15,001 2,561 22,141 23,849 29,076
Taxation (11,399) (9,830) (15,066) (6,613) (5,117) (6,906) (7,987) (8,551) (9,886)
Tax Rate 35.0% 33.8% 36.0% 30.9% 34.1% 269.7% 36.1% 35.9% 34.0%
RC after tax profit 21,213 19,255 26,752 14,757 9,884 (4,345) 14,154 15,298 19,190
Minorities (286) (324) (509) (181) (347) (272) (329) (338) (347)
RC Profit post Macondo 20,927 18,931 26,243 14,576 9,537 (4,617) 13,825 14,960 18,843
Post tax non-operating items 1,129 (561) (650) (622) (6,057) 11,565 (4,567) 416 0
Reported RC profit 22,056 18,370 25,593 13,954 3,480 6,948 9,258 15,376 18,843
Inventory holding gains/(Losses) (222) 2,475 (4,436) 2,624 (50) (402) 249 0 0
Reported HC profit 21,834 20,845 21,157 16,578 3,429 6,545 9,507 15,376 18,843
Adjusted RC Profit excluding Macondo 20,927 18,931 26,243 14,576 18,924 16,004 17,749 18,834 18,843
Per share data 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e
USD
Reported HC EPS (cents) - diluted 109.00 107.84 112.08 87.52 18.00 34.55 50.19 81.17 99.47
Adjusted RC EPS (cents) - diluted post Macondo 104.03 97.43 139.82 79.31 50.50 (24.37) 72.98 78.97 99.47
RC EPS adj. excl Macondo 104.03 97.43 139.82 79.31 99.80 84.49 93.70 99.42 99.47
Dividend per share (cents) 38.40 42.30 55.53 56.00 7.00 28.00 29.68 32.05 40.07
GBP
Reported HC EPS (pence) - diluted 59.14 53.86 60.55 55.92 11.94 23.05 33.39 54.08 66.23
Adjusted RC EPS (pence) - diluted post Macondo 56.45 48.66 75.54 50.68 33.50 (16.26) 48.56 52.62 66.23
Dividend per share (pence) 21.10 21.00 29.39 36.42 13.38 18.79 19.92 21.51 26.89
NBV 4.19 4.87 4.84 5.37 5.35 5.42 5.63 6.13 6.75
33 BP
Figure 37: Flow of funds and balance sheet summary
Sources & Uses of cash (USDm) 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e
Reported net income (FIFO) 21,834 20,845 21,157 16,578 3,429 6,545 9,507 15,376 18,843
Minorities 286 324 509 181 347 272 329 338 347
DD&A 9,128 10,579 10,985 12,106 12,641 13,507 14,009 14,589 15,195
Exploration expense 624 347 385 593 592 613 634 655 655
Tax adjustment (1,371) 287 1,845 742 1,666 2,816 2,879 1,942 2,447
Other items -2709 -1771 -2131 1111 -1905 -199 388 190 166
Cash Flow From Operations 27,792 30,611 32,750 31,311 16,770 23,555 27,747 33,091 37,654
Disposals 6,254 4,267 929 2,681 4,358 10,200 2,200 2,200 2,200
Shares issued 330 884 140 207 383 340 340 340 340
Total sources of funds 34,376 35,762 33,819 34,199 21,511 34,095 30,287 35,631 40,194
Capex (15,732) (18,445) (23,748) (21,392) (18,062) (18,184) (19,084) (19,864) (20,564)
Acquisitions (229) (1,225) (395) 1 (7,991) 0 0 0 0
Dividends (7,969) (8,333) (10,767) (10,899) (2,856) (5,508) (5,798) (6,219) (7,464)
Share purchases (15,481) (7,997) (2,707) 0 0 0 0 0 0
Other 189 566 447 577 56 0 0 0 0
Total uses of funds (39,222) (35,434) (37,170) (31,713) (28,853) (23,692) (24,882) (26,083) (28,028)
Change in Working Capital 380 (5,902) 5,348 (3,596) (340) 750 (450) 0 0
Cash surplus / (deficit) (4,466) (5,574) 1,997 (1,110) (7,683) 11,153 4,955 9,548 12,166
FX, debt acquired, other (285) (121) (218) 0 0 0 0 0 0
Increase/(Decrease) in net debt 4,749 5,695 (1,776) 1,120 7,661 (11,153) (4,955) (9,548) 12,166
Free Cash Flow Calculation 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e
Debt Adj. Cash Flow (FIFO reported) 27,631 30,215 32,484 31,224 16,617 23,266 27,633 33,134 37,922
Capex (15,732) (18,445) (23,748) (21,392) (18,062) (18,184) (19,084) (19,864) (20,564)
Working capital 380 (5,902) 5,348 (3,596) (340) 750 (450) 0 0
Disposals less acquisitions 6,025 3,042 534 2,682 (3,633) 10,200 2,200 2,200 2,200
Free Cash Flow 18,304 8,910 14,618 8,918 (5,418) 16,032 10,299 15,470 19,558
Investors cash receipts (23,450) (16,330) (13,474) (10,899) (2,856) (5,508) (5,798) (6,219) (7,464)
Balance sheet Structure USDm 2006 2007 2008 2009 2010e 2011e 2012e 2013e 2014e
Non Current Assets 142,262 155,874 161,854 168,315 177,838 170,441 171,290 172,229 173,104
Current Assets 75,339 80,202 66,384 67,653 70,228 70,631 70,382 70,382 79,425
of which: Cash 2,590 3,562 8,197 8,339 6,841 6,841 6,841 6,841 15,884
Total Assets 217,601 236,076 228,238 235,968 248,066 241,072 241,672 242,611 252,529
BP shareholders' interests 84,624 93,690 91,303 101,613 101,384 102,613 106,623 116,100 127,815
Minority shareholders interests 841 962 806 500 899 899 899 899 899
Total Debt 24,010 31,045 33,204 34,627 40,815 29,662 24,706 15,159 12,036
Long Term Liabilities 45,752 48,705 48,872 49,017 60,078 60,030 60,030 60,030 60,030
Other Current Liabilities 62,374 61,674 54,053 50,211 44,890 47,869 49,414 50,423 51,749
Total Liabilities 217,601 236,076 228,238 235,968 248,066 241,072 241,672 242,611 252,529
Net debt 21,122 26,817 25,041 26,161 33,822 22,669 17,713 8,166 -4,000
Equity & Minorities 85,465 94,652 92,109 102,113 102,283 103,512 107,522 116,999 128,714
Capital employed 106,587 121,469 117,150 128,274 136,105 126,180 125,236 125,164 124,714
Gross Debt/EBITDA (%) 56.8 76.8 61.8 99.6 142.0 170.9 66.3 38.5 26.8
Gross debt /Equity (%) 28.4 33.1 36.4 34.1 40.3 28.9 23.2 13.1 9.4
Gross Debt/(Gross Debt + Equity) (%) 21.9 24.7 26.5 25.3 28.5 22.3 18.7 11.5 8.6
Net debt/Equity (%) 24.7 28.3 27.2 25.6 33.1 21.9 16.5 7.0 -3.1
Net debt/Net debt & Equity (%) 19.8 22.1 21.4 20.4 24.8 18.0 14.1 6.5 -3.2
Note: any differences from the grid (e.g on free cash flow) are purely definitional
34 BP
Funding Analysis
BP
Gross cash position at 31 Dec. 09 8,339
USDm Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14
FCF (1,633) 6,121 8,213 13,227 17,090
Gross debt reimbursements (9,790) (6,861) (5,359) (5,528) (3,151)
New funds (debt, capital, divestment) 4,414 10,200 2,200 2,200 2,200
Other cash outflows (acquisitions etc) (7,991)
Dividend base case (2,856) (5,508) (5,798) (6,219) (7,464)
Share buybacks
SURPLUS/(SHORTFALL)
Annual (9,517) 3,952 (744) 3,680 8,675
Cumulative (9,517) (5,565) (6,308) (2,629) 6,046
Annual if div is 0 from Dec. 10 na 9,460 5,054 9,899 16,139
Cumulative if div is 0 from Dec. 10 na (57) 4,997 14,896 31,035
Available credit lines
Covenant(s): no covenants
Gross debt reimbursement post Dec.14: USD6,873m
Around two thirds of BP's debt is at floating rates and during the credit crisis, BP replaced a lot of short term
commercial paper with bonds, whilst balancing its cash flows at an oil price of USD60/bbl. Post the Macondo
accident, organic spend has been reduced 10% in 2010-11 (saving USD2bn pa), the dividend is suspended for
at least three quarters this year (saving USD8bn) and BP plans USD10bn of asset disposals (3 times more than
the previous norm). Including already announced c. USD9bn of E&P acquisitions this year, plus Macondo spill
costs, we expect balance sheet gearing (ND/ND+E) moving up from 20% at end 2009 towards 25% by end 2010 -
still within BP's previous financial framework (which was targeting gearing of 20-30%). (Comment updated on
07 Jul. 10)
35 BP
Analyst location
As per contact details, analysts are based in the following locations: London, UK for telephone numbers commencing +44; Paris, France +33; Brussels, Belgium +32;
Frankfurt, Germany +49; Geneva, Switzerland +41; Madrid, Spain +34; Milan, Italy +39; New York, USA +1; Singapore +65; Zurich, Switzerland +41
Rating definitions
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Neutral: The stock is expected to perform in line with the industry large-cap coverage universe over a 12-month investment horizon.
Underperform: The stock is expected to underperform the industry large-cap coverage universe over a 12-month investment horizon.
Sector Rating (vs Market)
Outperform: The sector is expected to outperform the DJ STOXX50 over a 12-month investment horizon.
Neutral: The sector is expected to perform in line with the DJ STOXX50 over a 12-month investment horizon.
Underperform: The sector is expected to underperform the DJ STOXX50 over a 12-month investment horizon.
Key ideas
BUY: The stock is expected to deliver an absolute return in excess of 30% over the next two years. Exane BNP Paribas Key Ideas Buy List comprises selected stocks that
meet this criterion.
Distribution of Exane BNP Paribas equity recommendations

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from these statistics. For regulatory reasons, our ratings of Outperform, Neutral and Underperform correspond respectively to Buy, Hold and Sell; the underlying
signification is, however, different as our ratings are relative to the sector.
41% of stocks covered by Exane BNP Paribas were rated Outperform. During the last 12 months, Exane acted as distributor for BNP Paribas on the 2% of stocks with
this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 15% of the companies
accorded this rating*.
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rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 7% of the companies
accorded this rating*.
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with this rating for which BNP Paribas acted as manager or co-manager on a public offering. BNP Paribas provided investment banking services to 7% of the
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BP historical closing price & target price (as of 06/07/2010)
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GBP0.00
07-07 10-07 01-08 04-08 07-08 10-08 01-09 04-09 07-09 10-09 01-10 04-10
Clo sing price Target price
Date Closing price Target price Rating Changes

27/01/2010 GBP602.00 GBP690 Outperform Target price
04/06/2009 GBP518.50 GBP590 Outperform Rating
29/01/2009 GBP504.25 GBP590 Neutral Rating & Target price
13/10/2008 GBP376.25 GBP600 Underperform Rating & Target price
04/10/2007 GBP557.00 GBP675 Outperform Rating & Target price
36 BP
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37 BP
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38 BP
Price at 06 Jul. 10 / Target Price
346p / 450p +30% BP (Outperform)
Reuters / Bloom berg: BP.L / BP/ LN Analys t: Irene Him ona (+44) 207 039 9526 Integrated Oil & Gas | Oil & Gas (Outperform) - United Kingdom
Com pany Highlights USDm / EURm
1,000.0
Enterprise value 145,827 / 115,233
900.0
Market capitalisation 98,281 / 77,661
Free float 98,281 / 77,661
3m average volume 578 / 456 700.0
Pe rform ance (*) 1m 3m 12m

A bsolute (20%) (46%) (21%)
Rel. Sector (15%) (29%) (22%) 500.0
T arget P rice
Rel. DJ STOXX50 (20%) (35%) (31%)
12m Hi/Lo : 655p -47% / 303p +14%
CAGR 2002/2010 2010/2014
EPS restated (**) 5% 19%
287.8
CFPS 2% 23% P rice 7.0*C FP S R elative to D J ST OXX50 (P ence)
Price (yearly avg from Dec. 01 to Dec. 09) 575.7 511.1 417.5 489.3 592.3 624.2 569.8 534.3 516.5 345.5 345.5 345.5 345.5 345.5
PER SHARE DATA (p) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
No of shares year end, basic, (m) 22 432.077 22 378.651 22 122.610 21 525.978 20 657.045 19 510.496 18 922.786 18 725.073 18 739.590 18 739.590 18 739.590 18 739.590 18 739.590 18 739.590
A verage no of shares, diluted, excl. treasury stocks (m) 22 573.725 22 504.448 22 423.652 22 292.536 21 411.447 20 195.458 19 236.956 18 873.664 18 939.353 18 958.469 18 942.998 18 942.998 18 942.855 18 942.855
EPS restated (USD) 0.44 0.34 0.56 0.76 1.02 1.04 0.98 1.39 0.77 0.50 (0.24) 0.73 0.79 0.99
EPS restated (p) 31 23 35 42 56 56 49 76 49 33 (16) 48 52 66
% change NS (26.8%) 53.4% 20.4% 35.3% (0.1%) (12.6%) 54.2% (34.9%) (32.9%) NS NS 8.2% 26.0%
CFPS 50.27 49.67 49.49 64.19 78.97 75.10 78.20 92.87 104.73 56.23 81.92 94.25 112.54 128.59
Book value (BV PS) (a) 201.7 190.2 191.4 195.0 212.9 235.7 247.5 266.1 347.8 356.4 360.7 374.8 408.1 449.3
Net dividend 15.00 15.88 15.66 15.25 19.15 21.10 21.00 29.39 36.88 4.89 19.54 20.72 22.37 27.97
STOCKM ARKET RATIOS YEARLY AV ERAGE PRICES for e nd De c. 01 to De c. 09 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
P / E (P/ EPS restated) 18.7x 22.7x 12.1x 11.7x 10.5x 11.1x 11.6x 7.0x 10.5x 10.4x NC 7.2x 6.6x 5.3x
P / E relative to DJ STOXX50 78% 102% 76% 84% 80% 100% 106% 52% 92% 111% NC 99%
P / CF 11.5x 10.3x 8.4x 7.6x 7.5x 8.3x 7.3x 5.8x 4.9x 6.1x 4.2x 3.7x 3.1x 2.7x
FCF yield 2.3% 1.5% 0.5% 4.3% 5.9% 5.6% 2.8% 7.7% 4.2% (1.6%) 6.2% 8.3% 13.4% 17.3%
P / BVPS 2.85x 2.69x 2.18x 2.51x 2.78x 2.65x 2.30x 2.01x 1.49x 0.97x 0.96x 0.92x 0.85x 0.77x
Net yield 2.6% 3.1% 3.8% 3.1% 3.2% 3.4% 3.7% 5.5% 7.1% 1.4% 5.7% 6.0% 6.5% 8.1%
Payout 48.8% 70.4% 45.3% 36.6% 34.0% 37.5% 42.7% 38.7% 74.7% 14.7% NC 43.1% 43.0% 42.7%
EV / Sales 1.42x 1.34x 1.09x 1.19x 1.05x 0.97x 0.88x 0.62x 0.82x 0.54x 0.53x 0.49x 0.44x 0.39x
EV / Restated EBITDA 8.3x 9.6x 6.9x 7.2x 6.4x 6.3x 6.5x 3.8x 5.5x 3.5x 3.4x 3.1x 2.7x 2.4x
EV / Restated EBIT 12.6x 16.8x 9.9x 9.7x 8.3x 8.1x 8.8x 4.7x 8.5x 4.9x 5.2x 4.6x 4.1x 3.7x
EV / OpFCF 22.9x 36.3x 34.5x 18.1x 12.8x 11.9x 19.9x 9.4x 14.8x NC 18.3x 12.8x 7.3x 5.1x
EV / Capital employed (incl. gross goodw ill) 2.2x 1.9x 1.8x 2.1x 2.5x 2.3x 2.1x 1.9x 1.4x 1.0x 1.0x 0.9x 0.8x 0.7x
ENTERPRISE VALUE (USDm ) 211,207 201,185 184,721 232,323 256,487 261,843 255,359 222,547 190,685 145,827 134,616 129,631 120,020 107,789
Market cap 185,950 171,687 151,150 195,527 227,575 230,055 218,325 184,000 150,868 98,281 98,281 98,281 98,281 98,281
+ A djusted net debt 19,609 20,273 20,269 21,732 16,373 21,122 26,817 25,041 26,161 33,822 22,669 17,713 8,166 (4,000)
+ Other liabilities and commitments 3,941 7,510 10,842 11,649 10,294 8,380 7,975 11,882 12,913 12,913 12,865 12,865 12,865 12,865
+ Revalued minority interests 1,707 1,716 2,459 3,415 2,245 2,286 2,242 1,624 742 812 802 772 709 644
- Revalued investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0
P & L HIGHLIGHTS (USDm ) Sw itch to IFRS data from FY e nde d 12/04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
Sale s 148,502 149,674 169,441 194,919 243,948 270,602 288,951 361,143 231,791 271,522 253,557 262,039 271,283 277,443
Re s tate d EBITDA (b) 25,465 20,987 26,825 32,395 39,843 41,593 39,553 58,517 34,536 42,161 39,267 41,941 43,815 44,580
Depreciation (8,683) (9,011) (8,076) (8,529) (8,771) (9,128) (10,579) (10,985) (12,106) (12,641) (13,507) (14,009) (14,589) (15,195)
Re s tate d EBIT (b) (**) 16,782 11,976 18,749 23,866 31,072 32,465 28,974 47,532 22,430 29,520 25,760 27,932 29,226 29,385
Reported operating profit (loss) 12,773 10,724 16,816 22,851 28,526 30,962 27,766 30,682 21,732 5,664 10,506 14,830 20,804 25,616
Net f inancial income (charges) (976) (499) (299) (165) (148) 185 13 (220) (510) (541) (762) (425) (154) 186
A ff iliates 1,195 964 1,214 2,280 3,543 3,995 3,832 3,821 3,901 4,144 3,068 3,186 3,198 3,274
Other 0 0 (63) (622) 184 (25) 0 0 0 0 0 0 0 0
Tax (6,375) (4,317) (5,050) (7,082) (9,582) (12,516) (10,442) (12,617) (8,365) (5,492) (5,994) (7,755) (8,135) (9,886)
Minorities (61) (77) (170) (187) (291) (286) (324) (509) (181) (347) (272) (329) (338) (347)
Goodw ill amortisation (1,246) (1,274) 0 - - - - - - - - - - -
Net attributable prof it reported 6,556 6,795 12,448 17,075 22,232 22,315 20,845 21,157 16,577 3,429 6,545 9,507 15,376 18,843
Ne t attributable profit re s tate d (c) 8,755 6,334 12,666 17,007 21,946 20,927 18,931 26,243 14,576 9,537 (4,617) 13,825 14,960 18,843
CASH FLOW HIGHLIGHTS (USDm ) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
EBITDA (re porte d) 22,702 21,009 24,892 31,380 37,297 40,090 38,345 41,667 33,838 18,305 24,013 28,839 35,393 40,811
EBITDA adjus tm e nt (b) 2,763 (22) 1,933 1,015 2,546 1,503 1,208 16,850 698 23,856 15,254 13,102 8,422 3,769
Other items (4,025) (1,026) (3,904) (1,546) (2,342) (4,248) (2,356) (16,454) 3,354 (24,380) (14,466) (12,285) (7,576) (2,912)
Change in WCR 1,051 (991) (2,063) (3,117) (4,437) 380 (5,902) 5,348 (3,596) (341) 750 (450) 0 0
Ope rating cas h flow 22,491 18,970 20,858 27,732 33,064 37,725 31,295 47,411 34,294 17,441 25,551 29,206 36,239 41,668
Capex (13,264) (13,423) (15,502) (14,876) (13,085) (15,732) (18,445) (23,748) (21,392) (18,062) (18,184) (19,084) (19,864) (20,564)
Ope rating fre e cas h flow (OpFCF) 9,227 5,547 5,356 12,856 19,979 21,993 12,850 23,663 12,902 (621) 7,367 10,122 16,375 21,104
Net f inancial items + tax paid (5,004) (3,027) (4,555) (4,354) (6,343) (9,053) (6,586) (9,316) (6,579) (1,011) (1,246) (1,909) (3,149) (4,014)
Fre e cas h flow 4,223 2,520 801 8,502 13,636 12,940 6,264 14,347 6,323 (1,633) 6,121 8,213 13,227 17,090
Net f inancial investments & acquisitions 1,693 2,458 6,221 3,545 11,356 6,214 3,608 981 3,259 (3,577) 10,200 2,200 2,200 2,200
Other (1,398) 235 545 (228) 39 (1,252) (489) 482 (171) 0 0 0 0 0
Capital increase (decrease) (1,133) (573) (1,889) (7,208) (11,315) (15,151) (7,113) (2,567) 207 383 340 340 340 340
Dividends paid (4,881) (5,304) (5,674) (6,074) (8,186) (7,969) (8,333) (10,767) (10,899) (2,856) (5,508) (5,798) (6,219) (7,464)
Incre as e (de cre as e ) in ne t financial de bt 1,496 664 (4) 1,463 (5,530) 5,218 6,063 (2,476) 1,281 7,683 (11,153) (4,955) (9,548) (12,166)
Cas h flow , group s hare 16,336 16,764 18,123 26,207 30,750 27,911 30,096 32,124 30,927 16,182 23,555 27,102 32,359 36,974
BALANCE SHEET HIGHLIGHTS (USDm ) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
Fixed operating assets, incl. gross goodw ill 95,919 106,847 103,670 108,479 101,090 107,025 115,421 124,466 129,701 138,699 133,176 136,051 139,126 142,295
WCR (1,959) (2,541) (2,412) 3,419 2,072 4,635 8,663 (4,456) 3,388 3,729 2,979 3,429 3,429 3,429
Capital e m ploye d, incl. gros s goodw ill 93,960 104,306 101,258 111,898 103,162 111,660 124,084 120,010 133,089 142,428 136,155 139,480 142,555 145,724
Shareholders' funds, group share 65,143 63,834 69,139 76,892 79,976 84,624 93,690 91,303 101,613 101,384 102,613 106,623 116,100 127,815
Minorities 598 638 1,125 1,343 789 841 962 806 500 899 899 899 899 899
Provisions/ Other liabilities 22,968 29,348 34,472 36,639 36,729 41,090 43,688 40,282 43,302 46,558 50,234 54,527 57,697 61,341
Net f inancial debt (cash) 19,609 20,273 20,269 21,732 16,202 21,420 27,483 25,007 26,288 33,971 22,818 17,862 8,315 (3,851)
FINANCIAL RATIOS (%) De c. 01 De c. 02 De c. 03 De c. 04 De c. 05 De c. 06 De c. 07 De c. 08 De c. 09 De c. 10e De c. 11e De c. 12e De c. 13e De c. 14e
Sales (% change) NS 0.8% 13.2% 15.0% 25.2% 10.9% 6.8% 25.0% (35.8%) 17.1% (6.6%) 3.3% 3.5% 2.3%
Organic sales grow th 0.8% 13.2% 15.0% 25.2% 10.9% 6.8% 25.0% (35.8%) 17.1% (6.6%) 3.3% 3.5% 2.3%
Restated EBIT (% change) (**) NS (28.6%) 56.6% 27.3% 30.2% 4.5% (10.8%) 64.1% (52.8%) 31.6% (12.7%) 8.4% 4.6% 0.5%
Restated attributable net prof it (% change) (**) NS (23.9%) 66.5% 34.3% 29.0% (4.6%) (9.5%) 38.6% (44.5%) (34.6%) NS NS 8.2% 26.0%
Personnel costs / Sales 4.9% 5.0% 5.1% 5.1% 4.4% 3.9% 4.0% 3.4% 5.3% - - - - -
Restated EBITDA margin 17.1% 14.0% 15.8% 16.6% 16.3% 15.4% 13.7% 16.2% 14.9% 15.5% 15.5% 16.0% 16.2% 16.1%
Restated EBIT margin 11.3% 8.0% 11.1% 12.2% 12.7% 12.0% 10.0% 13.2% 9.7% 10.9% 10.2% 10.7% 10.8% 10.6%
Tax rate 48.9% 37.5% 30.6% 31.2% 33.8% 40.2% 37.6% 41.4% 39.4% NC 61.5% 53.8% 39.4% 38.3%
Net margin 4.5% 4.6% 7.4% 8.9% 9.2% 8.4% 7.3% 6.0% 7.2% 1.4% 2.7% 3.8% 5.8% 6.9%
Capex / Sales 8.9% 9.0% 9.1% 7.6% 5.4% 5.8% 6.4% 6.6% 9.2% 6.7% 7.2% 7.3% 7.3% 7.4%
OpFCF / Sales 6.2% 3.7% 3.2% 6.6% 8.2% 8.1% 4.4% 6.6% 5.6% (0.2%) 2.9% 3.9% 6.0% 7.6%
WCR / Sales (1.3%) (1.7%) (1.4%) 1.8% 0.8% 1.7% 3.0% (1.2%) 1.5% 1.4% 1.2% 1.3% 1.3% 1.2%
Capital employed (excl. gross goodw ill) / Sales 50.8% 56.9% 50.9% 49.5% 36.1% 35.3% 36.9% 27.3% 48.2% 43.8% 44.5% 44.3% 43.9% 44.1%
ROE (bef ore goodw ill) 15.4% 11.9% 18.3% 22.1% 27.4% 24.7% 20.2% 28.7% 14.3% 9.4% (4.5%) 13.0% 12.9% 14.7%
Gearing 30% 31% 29% 28% 20% 25% 28% 27% 26% 33% 22% 16% 7% (3%)
EBITDA / Financial charges 34.5x 49.3x NC NC 13,281.0x 2,446.6x 70.1x 72.2x 108.6x 109.3x 72.4x 205.1x NC NC
A djusted financial debt / EBITDA 0.8x 1.0x 0.8x 0.7x 0.4x 0.5x 0.7x 0.4x 0.8x 0.8x 0.6x 0.4x 0.2x NC
ROCE, excl. gross goodw ill 10.7% 6.5% 11.9% 15.7% 21.6% 18.8% 15.1% 30.2% 11.1% 6.6% 9.0% 10.6% 13.6% 13.5%
ROCE, incl. gross goodw ill 8.6% 5.3% 10.1% 13.5% 18.4% 16.1% 13.0% 24.8% 9.3% 5.5% 7.5% 8.8% 11.3% 11.3%
WA CC 7.7% 7.5% 7.5% 7.7% 6.9% 6.9% 6.9% 9.0% 8.5% 8.7% 8.7% 8.7% 8.7% 8.7%
A verage number of employees 109,150 116,300 108,150 104,200 102,700 97,100 97,200
(a) Intangibles: USD20,168.00m, or USD1p per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost
(c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles from M&A, exceptional restructuring, (*) In listing currency, with div. reinvested, (**) also adjusted for am. of intangibles from M&A, or for am. of gwill for pre IFRS years
LONDON (+44) 207 039 9400 MADRID (+34) 91 114 83 00

PARIS (+33) 1 44 95 40 00 MILAN (+39) 02 89 63 17 13
BRUSSELS (+32) 2 400 3750 NEW YORK (+1) 212 634 4990
FRANKFURT (+49) 69 42 72 97 300 SINGAPORE (+65) 6212 9055
GENEVA (+41) 22 718 65 65 ZURICH (+41) 1 228 66 00

BP - BNP July 2010

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Equity Research BP

Oil & Gas - United Kingdom 7 July 2010

Report - Large Caps Outperform

Price (6 July 2010)

Irene Himona Alexandre Marie (+44) 207 039 9427

Please refer to important disclosures

Pe rform ance (*) 1m 3m 12m

Financials & Valuation _____________________________________ 6

Equity & Bond markets - signals of distress____________________ 15

Identifying the costs ______________________________________ 17

Counting the costs scenarios _____________________________ 19

Punitive damages impossible to define______________________ 28

Funding analysis ________________________________________ 35

Financial highlights ______________________________________ 39

Figure 1: BP EPS changes including base case Macondo cost scenario

Source: Exane BNP Paribas estimates

Figure 2: BP Production profile post Macondo & asset disposals

Source: Exane BNP Paribas estimates

Figure 4: BP Macondo well costs & BP DCF: three cost scenarios

Macondo costs: USD46.8bn a harsh base case

Figure 6: BP Macondo well costs - three cost scenarios (2010-14 aggregates)

BPs response - impact on growth and earnings

If all of the USD10bn of asset disposals announced by BP were to occur in the

Hence, we have reduced our production forecasts accordingly by approximately that

Figure 7: BP Production profile post Macondo & asset disposals

Source: Exane BNP Paribas estimates

EPS excluding Macondo costs: 7% pa lower 2011-14

Figure 8: BP EPS changes excluding Macondo 2011-14e

Source: Exane BNP Paribas estimates

Figure 9: BP EPS changes including base case Macondo cost scenario

Source: Exane BNP Paribas estimates

Cost of capital increased from 7.8% to 9.1%

Cost of debt 4.0 5.0

Gearing ratio target 20 18

WACC 7.8 9.1

Note: we assume a lower targeted gearing/higher cash post Macondo

Target price: from 690 pence to 450 pence per share

Dividend yield 2011e

Source: Exane BNP Paribas estimates

Valuation sensitivity to Macondo cost scenarios

Risk/reward appears positive

Oil Price Bourbon

Anadarko CGG Veritas

Figure 15: BP share price and CDS spreads (

BP (p/share left axis) BP 5YR CDS PREM. (right axis)

Source: Datastream, Exane BNP Paribas

3.875% Mar 2015 3.625% May 2014

Source: Datastream, Exane BNP Paribas

Figure 18: Daily costs incurred: sharp 22% acceleration in 10 days

Costs of stopping the leak and clean up

Note: amounts include the USD2.49bn already spent

Source: Exane BNP Paribas estimates

Figure 21: Well containment and clean up cost aggregates USDm

Source: Exane BNP Paribas estimates

Figure 22: Exxon Valdez

Punitive damages initial award 1994 5,000 Alaska federal jury

Source: Exane BNP Paribas estimates

Fines under the Clean Water Act

Source: Datastream, Exane BNP Paribas

Source: Exane BNP Paribas estimates

Source: Exane BNP Paribas estimates

Source: Exane BNP Paribas estimates

Figure 29: Claims from affected Gulf residents and businesses