Why BP should file for bankruptcy

To survive, the company must seek protection so it can address the coming tidal wave of damage claims.

By Jim Cramer Jun 28, 2010 9:37AM
TheStreet's Jim CramerIt is in everyone's interest to keep BP (BP) alive and well: the claimants, the country, the pensioners. All of them. That's why I think it is imperative that BP move pre-emptively to file for bankruptcy protection.


Last week, Ken Feinberg, the administrator of the claims fund, told Bloomberg that no claim has been denied. Sounds orderly. However, I think we've seen only the claims of the smallest of businesses, the first to be wiped out.


It's in no one's interests to file claims right now, other than the most desperate people who need the money and are thinly capitalized. Any big business with tourism on the line would be nuts to put in a claim, knowing that the spill hasn't even hit the resort areas yet.


So if you are BP and you want to protect yourself and preserve the enterprise, you need to file ahead of those claims so there is an orderly liquidation of them rather than an orderly liquidation of BP.

I wonder whether anyone at BP is thinking this way. After all, we got press reports of an imminent BP bond offering to pay for the $20 billion it has promised. Where is it? Why aren't they doing it now, ahead of the hurricane threats? Why didn't they bring it to market this week when there are still so many believers? Before Vice President Joe Biden goes down to the Gulf and tells BP to "bite me," in the immortal words of Gen. Stanley McChrystal?


Every day that goes by is a day that claims are growing. Every day that goes by, it's more likely that the Justice Department will take action or that the government will start talking about the need to make sure BP has the money on hand.


Perhaps BP realizes the futility of raising money in the bond market? Perhaps it is going to sell millions upon millions of shares of common stock? Or perhaps it sees the writing on the wall about the gravity of not being a going concern and wants to get ahead of it?


The more we learn about the shoddy work and cheap decisions made on that platform, decisions that were not in keeping with the industry's practices, the more likely we will have more discussions about the "gross negligence" of BP, like the comments from Jim Hackett, the chief executive of Anadarko (APC), BP's partner.


These concerns suggest the company is contemplating radical action if storms hit, relief wells are delayed or protests affect its business and cash flow.


I hear endless confidence in the relief-well concept, but Bruce Bullock, the director of the Maguire Energy Institute at Southern Methodist University, was quoted in the Miami Herald -- whose coverage of this issue is a must-read -- "That depends on how you defined success. It's quite unlikely they'll hit it on the first stab. They're aiming at a salad plate thousands of feet down."


The Herald story continues: "The target? A 7-inch pipe buried in concrete 12,000 feet below the seafloor. A year ago, the Herald reports, a blowout off the cost of Australia failed to hit its target four times before connecting, a delay that would mean the release of an additional 1.62 million barrels into the Gulf, because each miss means the crew has to back up the drill bit and try again. Not reassuring when you consider that the Australian well was in 250 feet of water, not 5,067 feet like this one, and the reservoir is less than half as deep as Moncado, which is 13,670 feet below the seafloor."


Sure, as I said earlier, everything could go right on this relief well. But let me ask you: What does that mean? Could you make four points with BP? Eight? I just don't get the excitement about this one, or the confidence.


At the time of publication, Cramer had no positions in stocks mentioned.

Jim Cramer is co-founder and chairman of TheStreet. He contributes daily market commentary for TheStreet's sites and serves as an adviser to the company's CEO.

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