On tonight’s Kudlow Report, I discussed the BP oil spill in the Gulf with CNBC host Larry Kudlow; Bruce Lanni of Nollenberger Capital Partners; and energy analyst John Kilduff. Our exchange begins at about 5:25 of the segment. Here is a transcript:
Larry Kudlow: Is BP really a British company or is it just a big multi-national company? I think a lot of their stuff, so much of their stuff is right here in America, in North America. But let’s bring in our panel. We have got a lot of things to talk about. Here now is Peter Flaherty of the National Legal and Policy Center, CNBC Contributor and energy analyst John Kilduff and in a moment we are hoping to get Bruce Lanni hooked up. He spoke directly with BP CEO Tony Heyward yesterday. Mr. Lanni is an energy portfolio strategist for Nollenberger Capital Partners. He will add a lot on this. Peter Flaherty, let me go to you. You probably heard the distinguished House Speaker Nancy Pelosi declare that BP must end its dividend. What do you think about this? Do you think that politicians should decide dividend and other financial policies of corporations?
Peter Flaherty: Larry, I think the Board of Directors of BP should set the dividend, not Nancy Pelosi. Congress does not have a very good track record of managing probably the biggest enterprise in the world, the United States government. In fact, the government is bankrupt. To the extent that the politicians have meddled they have made things worse. We have this drilling moratorium which is adding injury to injury to the people in the Gulf who are losing their jobs. You have the initiation of a criminal probe meaning that the lawyers at BP are now running the show. I don’t know any lawyers who are any good at plugging mile-down gushers under the ocean. And then you have this dividend fiasco which has nothing to do with stopping the leak and I believe will lead to a situation, if BP caves, that the politicians will just smell more tribute and will come up with another way to upend the company.
Larry Kudlow: Well all right we are waiting for Mr. Lanni, we hope we get him, but John Kilduff, let me just ask you. From a financial perspective, ok, politicians should not meddle in corporate; I mean we do not want them to take over BP, the way they took over GM, the way they took over Chrysler, they way they took over Citigroup, etc. Hopefully that will not happen. On the other hand, with the spill rate now, estimates up to thirty forty thousand barrels a day…
John Kilduff: As high as fifty thousand, potentially.
Larry Kudlow: …fifty potential. That is over twice what the original spill rate was. Won’t BP need the money? It is about twelve billion dollars a year. That is what the dividend comes to. Aren’t they going to need to put that money in escrow, rather than pay out a dividend, in order to meet all the claims? That is my financial question to you.
John Kilduff: I think so. I think that the calamity, the magnitude of what is going on here – the politicians for once represent the people and the stakeholders here that are entitled to that money potentially. Not the shareholders.
Larry Kudlow: Do you think the politicians are right on this?
John Kilduff: I think that on this that they are right and I think what BP should do is issue script for the dividend, withhold it for the next several quarters, and if things aren’t as bad as some of us fear, as I fear, then I will happily see them pay that script off. But, until then, no.
Larry Kudlow: All right, Peter Flaherty, you heard that. I mean, if it makes sense financially, Peter and if they have to pay off the stakeholders, as John Kilduff politely calls all this disaster that BP has wreaked havoc on, why shouldn’t they do it?
Peter Flaherty: What is the point of script or putting it in escrow? Either pay the dividend or don’t pay the dividend. I think you could make the case that the dividend could be cut because of the decline in the share price. The dividend is now something like ten percent. You could cut it in half and it would still be five percent. It would be very close to what BP shareholders are used to. But don’t try and make this implication that the shareholders are apart from the people.
Larry Kudlow: Well Nancy Pelosi is going to declare victory. So will Barack Obama
Peter Flaherty: Something like eighteen million in Britons hold BP shares.
Larry Kudlow: Is this an example of the government taking over BP. It that where you are going with this, Peter?
Peter Flaherty: Well sure, I was on this network…
Larry Kudlow: Is this the government taking over BP, the way they took over General Motors, and Chrysler and virtually took over Citigroup. Is that what you are saying, we own AIG. We will throw them all in there. BP on the taxpayer dole, is that where you are going?
Peter Flaherty: Yes and they are just getting started. I was on this network last year to complain about Obama firing Rick Wagoner the CEO of GM. Now, I was not a Wagoner fan. I actually said, what is next? I actually asked whether Obama would start picking the CEOs of the oil companies. I guess I was right.
Larry Kudlow: All right, John Kilduff the cost factor is going to be crucial. What’s at fifty thousand barrels a spill rate, first of all, what does that increase their cost, their potential liability? Do you have any sense of that big number?
John Kilduf: Yeah, I did some math on this actually and if you go to the Clean Water Act itself, if they can prove gross negligence, which I think they can here in this case. It is forty three hundred per barrel. So that works out to over ten billion dollars in fines right there criminally. And then, just the numbers to date have been about forty billion on the clean up. So my numbers put this upwards of a hundred billion dollars.
Larry Kudlow: A hundred billion dollars.
John Kilduf: Yeah. And look at what BP has done to our Gulf of Mexico, potentially. It could become the next Dead Sea.
Peter Flaherty: Well sure but what is the point of putting them into bankruptcy?
Larry Kudlow: Hang on one second, I want to bring in…
John Kilduf: I want to make sure the US government, the US people get paid.
Larry Kudlow: Hang on, Bruce Lanni…
Peter Flaherty: Well they are not going to get paid in bankruptcy.
Larry Kudlow: Hang on one second.
John Kilduf: There will be more money in that estate for them to get paid if they do not have that ten billion…
Larry Kudlow: Bruce Lanni, welcome to the Kudlow report. It is a bit unruly, but thank you very much for giving us a Friday evening.
Bruce Lanni: Thank you, Larry.
Larry Kudlow: You have heard some of this debate, you know it anyway. Spill rates have been reestimated. Mr. Kilduff over here says BP’s liability could come to a hundred billion dollars. The dividend is about twelve billion dollars a year. What do you know? We hear you talked to Mr. Heyward, maybe the other members of the Board. Whether you want to divulge that is entirely up to you. But does it make financial sense for BP to cashier the dividend, put it in some kind of escrow fund for now?
Bruce Lanni: No Larry. Right now it is purely political. The estimates and even one of your guests that are providing are very excessive compared to anything I have calculated or even a lot of analysts that I have spoken to on the street. I think this year’s liabilities could maybe be around six billion dollars. That will be the clean up costs. Then, once you add in the punitive damages, the civil liabilities, you are maybe going to get up to a thirty billion dollar gross number. And that is gross. I think that everybody here is painting the picture on BP as if it has sole liability and it doesn’t. It has a sixty five percent interest. They still do not know the cause. It is going to take years to determine what actually went wrong. There has been a series of things. At this juncture to say it is all on BP, I think is incorrect.
Larry Kudlow: Are you suggesting Bruce that Transocean and Anadarko are going to have to pony up also?
Bruce Lanni: Absolutely, I mean they are partners in on this. Anadarko has twenty-five percent. Ansui has ten percent so they are. And then, we still do not know what caused the accident. We don’t know if Transocean is liable for it. We don’t know if Halliburton is liable for it. BP has been tried, convicted and sentenced by everyone, especially the media and I think that is improper at this time.
Larry Kudlow: All right. Do you feel though, from what you know. Maybe your instincts, your conversations, whatever, that they are in fact going to cut the dividend or sequester the dividend into some kind of fund. I mean the reports coming out of London today are very significant Bruce. They are pretty much saying that by Wednesday, which is when President Obama meets with the BP officials, we are going to get a dividend cut announcement, or some kind of dividend relief announcement. What is your opinion about that?
Bruce Lanni: I think, first of all, I want you to understand, the Board of Directors meets weekly. So they have been right in tune with what has been going on here. Coming next week, I would not be surprised if they did do a suspension or a deferred dividend to help placate the Administration.
Larry Kudlow: Is that in the stock market price, John?
John Kilduff: I think most definitely it is.
Larry Kudlow: That is already in the market. That is already in the bond market.
John Kilduff: That is why you saw the bounce.
Larry Kudlow: The market will applaud this. That is what you are saying?
John Kilduff: Absolutely. Yes.
Larry Kudlow: All right, so John, Peter Flaherty rather, the market is going to applaud this. You are the only guy who is going to give them a Bronx cheer.
Peter Flaherty: Well I do not know how long they will applaud. When the dividend goes down, the share price is going to go down. Who are the shareholders? In Great Britain it is eighteen million people who directly or indirectly hold BP stock. In this country it is millions and millions of people. It is anyone who has a pension or a mutual fund. There is no requirement that the government fine BP into bankruptcy. Yeah, these fines are on the books, but Boeing, for instance was involved in a number of scandals recently and they came to a universal settlement – they paid five hundred million dollars. Now , I am not suggesting that BP be let off easily, but their liabilities can be mitigated by a reasonable US government that will keep the company out of bankruptcy and allow it to function. You know this company has annual revenues of two hundred and fifty billion dollars. It is the fourth biggest company in the world. I do not want to say that we are fortunate that they are the people who may be responsible for this, but there are a lot poorer companies around who could have engaged in this kind of possible negligence.
Larry Kudlow: But Bruce Lanni…
Bruce Lanni: Larry.
Larry Kudlow: Go ahead, please.
Bruce Lanni: Can I cut in here just for one second. You are right I did have a chance to talk to Tony Heyward at length. Look, I think there is a couple of things we have to understand. If there is a dividend suspension or deferral I believe it will be for one quarter. Let me explain why. There is two relief wells that are being drilled in the Gulf of Mexico. Once those relief wells are finalized and they seal the well, then it will take about two months to do the majority of the clean up activities in the Gulf of Mexico. At which time BP will be able to access what other damages and liabilities there will be. So I don’t look at a panic of selling by shareholders because the wave will probably be couched because it will be a suspension and a deferral. Then you have got to talk about the issue of bankruptcy which has been brought up.
Peter Flaherty: Totally premature.
Bruce Lanni: That isn’t even a remote possibility. The US government has a better chance of becoming insolvent before BP does.
Larry Kudlow: Well the US government is insolvent. The US government is already insolvent. There is no question about that. I guess my question is whether BP is also insolvent and just won’t admit it. I know Uncle Sam is insolvent. I know California is insolvent. I know New York is insolvent. They are all like Greece. The question is has Greece come to BP?
Bruce Lanni: No. You are right, but there is…
John Kilduff: We have only seen the beginning of this. To say it will only take two months to clean it up, from our collective lips to God’s ears.
Larry Kudlow: Do you think Bruce is too optimistic about that?
Bruce Lanni: I said for the majority of the claims.
John Kilduff: BP has been way too optimistic about this from the beginning. And they have been wrong about everything from the beginning. It was only supposed to be five thousand barrels, it is fifty thousand.
Larry Kudlow: What about this headline? What about this Reuters headline? BP to nearly double siphoning in July. This is from the Coast Guard. Now that looks like they are gaining on it.
John Kilduff: They are absolutely gaining on it. There is some good news here. Today, the cap seems to be working. I think that they have a second cap ready to go in place, they have learned from the first one. They are on it. They are finally going to make some progress on that front.
Larry Kudlow: All right. Bruce you agree, I guess that is what you are arguing.
Bruce Lanni: I agree with that. There is a couple things. First of all I think by the middle to the end of next week you will see that the capture rate is going to rise to about seventy five to eighty percent. I do not agree at all that BP has been deceiving us. It is five thousand feet under the water. It had a riser pipe that was attached to it and bent. It was very difficult to measure the flow rates. They still can’t measure the flow rates.
Larry Kudlow: The actual flow rate is coming from scientists Bruce. It is not from BP. This forty to fifty thousand estimate is from scientists. I do not think BP has signed off on that have they?
Bruce Lanni: And those,
John Kilduff: it is a nineteen inch pipe going to full bore. I am having a hard time believing they can’t figure that out.
Bruce Lanni: But they don’t know the pressure that is coming out at this point and time, number one. Number two, it’s those same scientists were the ones involved early on in estimating flow rates. This is a very fluid situation. As the wells start to depressurize, the flow rates are going to go down naturally anyway. To say that BP has been deceptive on this I think is a gross misjudgment on that.
John Kilduff: I said over optimistic.
Larry Kudlow: All right, we will see. Thank you gentlemen. I just want to ask on the way out, Peter Flaherty, is the US government bankrupt? Are they insolvent?
Peter Flaherty: They are not technically bankrupt, but they are certainly getting there.
Larry Kudlow: I couldn’t resist.
Peter Flaherty: What we need here is some leadership from the White House.
Larry Kudlow: Really?
Peter Flaherty: They are trying to have it both ways.
Larry Kudlow: Would you like them to lead on the budget the way they have led on BP? Is that what you saying?
Peter Flaherty: Maybe they should just get out of the way in both instances. Gibbs, the White House press spokesman said Obama hadn’t talked to Tony Heyward yet because it was a corporate governance issue, and he should be talking to the Board. Now Obama wants to substitute himself for the BP Board on the dividend issue.
Larry Kudlow: Who need the President? We’ve got Bruce Lanni, that is the key thing. Bruce thank you very much for helping us tonight. Peter Flaherty, as always, John Kilduff. I like your optimism, you are more optimistic on the clean up.
John Kilduff: They are doing this right.
Larry Kudlow: But the oil is still out there, the rest of that stuff is still out there. And isn’t that the biggest threat to the shore line?
John Kilduff: It is going to take months for this to be cleaned up, if ever.
Larry Kudlow: Just months? Not years, months?
John Kilduff: I think years. And we still don’t know the magnitude of the ecological disaster we are facing down. END TRANSCRIPT