CNBC Analyst: BP to Lose Offshore Leases, Faces Bar from Government Contracts

June 15th, 2010 9:28 AM

With the federal government - both on Capitol Hill and in the White House - beginning to take investigative and punitive action against BP (NYSE:BP), the future of the company, at least in the United States, is in peril.

On CNBC's June 14 "The Kudlow Report," John Kilduff, a CNBC contributor and the vice president of MF Global was asked by host Larry Kudlow about a potential debarment from eligibility to be awarded government contracts, which have been very lucrative for the embattled oil giant.

"John, this would effectively be debarment," Kudlow said. "This is something we talked about a week ago, and the prevailing attitude was there would not be debarment because that hardly ever happens in American commercial history. Is President Obama having this as a Sword of Damocles over BP?"

And Kilduff explained that this debarment wasn't necessarily as difficult procedurally to do as some might have thought, which according to him was warranted.

"No question about it," Kilduff replied. "And, you know, we were led to believe that ... it was a very sort of torturous procedural issue. Clearly it's not, and clearly BP's track record supports amply a debarment action here."

According to Kilduff, debarment from federal contracts would mean the loss of a $2.1-billion annual Pentagon contract. But he also said this potential government action would force the British petroleum giant to divest itself of its American assets at below-fire sale prices.

"It's not just that," Kilduff said. "Of course it would be very damaging, and plus all the other asset sales, they would have to divest themselves of their Gulf of Mexico assets, their Prudhoe Bay asset, and keep this in mind, this would be more than a fire sale, Larry, because the whole game as changed. As being the lead driller, we're seeing the extent of the liabilities that the lead driller has. Who's going to want to step up now and take over a BP-run operation? You don't know what kind of rat's nest you're getting into."

Reports have surfaced that BP has sought the services of Wall Street banking firms to procure a potential takeover defense. According to MarketWatch, ExxonMobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A) and Chevron (NYSE:CVX) are all named as potential buyers. Kudlow asked if these government actions were a foreshadowing of what was to come.

"These government punishments and sanctions, and it's coming from President Obama, it's coming from Sen. Harry Reid, who's pushing for this $20 billion escrow fund, now, is this why we are hearing rumors that BP has actually hired Wall Street banking firms for some kind of takeover defense? Is that - can I connect those dots?"

Kilduff's response was that indeed these actions by BP were no more than efforts to "cut corners," which after facing attacks on all these fronts and having its bottom line battered, makes it vulnerable to such a takeover attempt.

"Oh, absolutely, Larry," Kilduff replied. "And look, what we're seeing from Congressman Waxman's hearings tomorrow, the fingerprints are there. What we talked about for all 56 days I feel like on your program, it is a situation of corners cut to save a little bit of money that got us into this mess. They're caught dead to rights on this. That's what you're going to see tomorrow. That's what's been released this afternoon. And it's clear they're going to be under severe attack from all kinds of quarters - shareholder lawsuits, the federal government, civil, criminal liabilities. All of it."