Last week, US district court judge Carl Barbier found BP guilty of "gross negligence" and "wilful misconduct" in the Deepwater Horizon disaster. This ruling is based on an account of events leading up to the explosion in which certain BP employees ignored warning signs. Transocean, which owned the rig, and Halliburton, which provided cement for the well, were found merely "negligent".
The wording is crucial because the statutory maximum penalty under the Clean Water Act in cases of gross negligence is $4,300 (£2,663.65) per barrel - up from $1,100 for simple negligence. The US government reckons 4.2m barrels were spilled, bringing BP’s potential liability to about $18bn. So far it has made provisions worth $3.5bn for the Clean Water Act, so the news implies extra losses of $14.5bn or 47p per share. BP’s shares fell 29p on the day of the announcement.
The company, which has already written off £43bn as a result of Deepwater Horizon, disputes the account of events and will challenge the decision. Some investors hope the final judgement will be less harsh. "The failure of the well was multi-causal and the verdict of gross negligence may not stand up to the scrutiny of appeal," says Charles Whall, co-manager of Investec Asset Management’s energy funds.
Remarkably, even the UK government is lobbying on BP's behalf. A filing to the US Supreme Court argued that lower courts' interpretation of the company's 2012 settlement for spill victims was undermining confidence in the "vigorous and fair resolution of disputes" and eroding the "trust necessary for international commerce". This filing does not relate directly to the accusation of gross negligence, but its timing - coming two days after Judge Barbier’s ruling - can hardly be coincidental.
The market was not impressed by news of the UK State's intervention: the shares fell on Monday morning, when it emerged. But even if BP is more successful at appeal than it has been in its legal battles so far, investors can hardly relax. The negligence ruling was supposed to be the point at which BP drew a line under the calamity. That point now looks as far off as ever.
This matters because almost everyone has exposure to BP in some form or another. It has declared about £4.1bn in dividends over the past year - about 5.5 per cent of all the dividends paid out by companies listed in the FTSE All-Share index. That’s behind only Royal Dutch Shell (RDSB), which accounts for a staggering 9.1 per cent of all dividends, and HSBC (HSBA), with 7.2 per cent. If you own any kind of tracker fund, you own part of BP.
I flirted with the idea of recommending BP’s shares to income-hunters earlier this year. That followed a conversation with Ben Whitmore, the contrarian fund manager in charge of Jupiter’s UK Special Situations fund. He argued that the stock - then as now trading on a single-digit earnings multiple - was already pricing in a worst-case scenario.
But I was uncomfortable with the opacity of the group's legal situation, so I ended up recommending the big miners instead. That call has itself been thrown off course by the falling iron-ore price. The wider point is that many of the sectors on which income investors have traditionally relied face crises of growth. AstraZeneca (AZN) and GlaxoSmithKline (GSK) do not expect earnings expansion for some years; utilities are scrambling to prove how little profit they make in the run-up to the 2015 general election; and regulatory pressure on banks shows little sign of easing.
The top 10 UK dividend payers are shown below. The most reliable options may be Vodafone (VOD), whose problems in continental Europe are at least cyclical; National Grid (NG.), which is somewhat insulated from the effects of political posturing; and HSBC, which is so well diversified that it can brush off almost any specific problems local economies or regulators throw at it.
