I'm obviously not alone on this. The Bloomberg consensus split on the stock in terms of buy/hold/sell recommendations reads 11/17/5 - which is somewhat indeterminate by industry standards. Consensus for the likes of Chevron, ExxonMobil and Royal Dutch Shell (RDSB) are all far more definitive, certainly in terms of projected cash flows and earnings. But, while this divergence of views could imply that BP is unlikely to have been oversold, the broadening political fallout from the Deepwater Horizon disaster dominates column inches, thereby obscuring the underlying investment case.
A drop in the ocean
Once the scale of the spill from BP's Macondo well became apparent, it was obvious that the legal processes would take years to resolve, but more than three years on from the disaster and the final bill for the damage has yet to be tabled. The second phase of a US District Court trial in New Orleans is now under way, which will rule on a dispute between BP and the US government about the actual amount of crude oil that was spilled in the Gulf of Mexico, together with the degree to which BP was culpable in the failure to plug the blown-out well for a period of 87 days. (Experts from the US Justice Department give the estimate of the spill at 176m gallons, while BP has urged the court to use an estimate of 103m gallons - the 73m difference a drop in the ocean, really).
The verdict on these particular issues will have a significant bearing on the final amount that BP will be required to pay for contravening the US Clean Water Act. The key legal point is whether or not it can be proved that BP had been "grossly negligent" in its actions before, during and after the spill. BP had originally set aside $4.5bn to cover criminal fines and penalties, but that could rise to as much as $18bn if Judge Carl Barbier throws the book at BP during the third phase of the trial, which will set the ultimate penalties - a date for this phase has yet to be set.
Compensation culture
Aside from the case brought by the US Justice Department in New Orleans, BP has other legal wrangles to bear. On the upside, following persistent protests by BP's lawyers, a US Federal Appeals court recently put the kibosh on a number of private settlements linked to the Gulf of Mexico spill. The implication being that some claimants have simply 'tried it on' - my words, not the judge's. The existing payout formula was deemed too generous, and open to abuse from businesses and individuals that were never actually in harm's way. It's a victory, of sorts; originally, BP had set aside $7.8bn to cover these private actions, but the likelihood is that even with this favourable judgement it will still have to fork out around $15bn to claimants. If the judgments don't run BP's way, we can say that it will have to find a maximum of approximately $20.7bn to cover excess commitments over its initial estimates for its civil and US Clean Water legal obligations.
A right bunch of torts
If that wasn't enough, the group is now faced with a potential class action being pursued by a phalanx of irate institutional investors this side of the pond. Up to last week, foreign shareholders (non US-domiciled) in BP had been prevented from seeking damages through the US federal legal system by the US Supreme Court. But a Texas District court has ruled that BP's overseas shareholders are entitled to use both Texas common law and UK common law in pursuit of their claims.
A group of institutional investors, including GAM Fund Management and Skandia Global, are claiming that BP's news releases to the market in the wake of the disaster underplayed the severity of the spill, thereby skewing the funds' subsequent investment decisions. The institutional investors in question bought BP shares immediately after the spill in 2010, but now contend that they would never have done so if they had known the full extent of the problem. (The term 'caveat emptor' readily springs to mind, particularly at the thought of someone managing my pension - or anybody else's for that matter - who thinks that increasing a fund's weighting to an oil major that's just sprung a leak is a good idea). Anyway, the decision has cleared the way for BP to be sued under Texan law for statutory fraud and for fraud and negligent misrepresentation under common law. It's thought that compensation linked to this institutional class action, if successful, would only run into tens of millions of dollars - a mere bagatelle where BP is concerned.
To Russia with love
Of course, BP's relative underperformance could also be linked to its exploits in Mother Russia subsequent to Deepwater Horizon. The saga with its TNK-BP joint venture partners dragged on for months, prompting doubts over Bob Dudley's stewardship, while weighing heavily on investor sentiment. There are some encouraging signs, however, that the group's budding commercial relationship with state-controlled energy giant Rosneft may eventually bear fruit. BP is looking to become the first oil major with a long-term deal to buy seaborne Urals crude from Rosneft. The arrangement is likely to be on different terms to the offtake agreements that Rosneft has in place with commodity houses like Vitol and Trafigura. It's been reported that the deal initially involves BP purchasing up to $5.4bn in oil from the Russians, including up to 2m tonnes of fuel oil worth $1.5bn.
The road to Morocco
The other intriguing news of late is that BP has made a major commitment to deep-water exploration plays off the coast of Morocco. The group has made a firm commitment to US driller Kosmos to provide funding for wells in three blocks it has farmed into: BP has taken a 45 per cent stake in the Essaouira and Tarhazoute licence blocks, and a 26.3 per cent share in the highly prospective Foum Assaka licence. BP will cover all of Kosmos' share of drilling costs in each of the prospects, and it has also agreed to spring for some of Kosmos' share on any follow-up wells, in addition to covering a pro rata share of past costs connected to the licences.
The fact that BP has given a tacit seal of approval provides a positive beat for those oil & gas already committed to the region, particularly as the prospects are pretty much 'blue-sky' at this stage. It was certainly welcome news for one of our preferred junior plays in the sector - Fastnet Oil & Gas (FAST) - a third party in the Foum Assaka licence, which is also pursuing its own farm-out process to bring in a funding partner. The industry view is that the BP move effectively derisks the region - only time will tell. Eyes now will be on upcoming drill work by Cairn Energy (CNE) and Genel Energy (GENL), both of which the IC has on a buy. Hopes are high: success at the early stage high impact wells could help to establish Morocco as a major new oil frontier and the majors - as they have in Kurdistan - will descend en masse. This time, however, BP may have stolen a march on its rivals.
