What's new:
• Unfavourable Macondo ruling
• Legal complexities mean exact penalty is unclear
• Case could drag on for years
US district court judge Carl Barbier found BP (BP.) guilty of "gross negligence" and "wilful misconduct" this month under the Clean Water Act for its actions leading up to the Macondo oil spill in the Gulf of Mexico in 2010. The guilty verdict implies a maximum penalty of about $18bn (£11bn), equivalent to roughly 47p a share on top of BP's existing provisions of $3.5bn for this particular penalty.
Undoubtedly this is a setback for BP, which had hoped finally to draw a line under the disaster. Yet legal complexities mean the ruling might not be as bad as it seems. The oil behemoth is digging in for the legal long-haul, and it could be several more years until it has to pay the fine, whether in full or part.
BP's lawyers intend to appeal immediately to the Fifth Circuit court. If that's rejected, it can appeal to another appeals court. Finally, it could appeal to the US Supreme Court. And all this relates to just the phase one ruling, which seeks to apportion blame. The judge has yet to hand down his ruling for phase two, which will try to estimate how much oil was spilled. And phase three of the trial, looking at how to apply financial penalties, isn't due to start until January 2015. All these could theoretically be appealed by either side.
Investec Securities says...
The fine will not be determined until some time in 2015 at the earliest. But it could be much later; we note Exxon took almost 20 years to settle the 1989 Valdez spill in Alaska. Plus, by law the judge must apply eight discount factors to BP's fine, suggesting that the market reaction - BP's share price fell 29p on the day, less than the maximum 47p a share additional penalty - was about right. BP believes that any fine should be significantly lower than the maximum calculation. We agree and have reduced our PE-based target price by only 20p to 440p. Hold.
JPMorgan says...
BP's chief financial officer and general counsel hosted a conference call that underlined how many years could elapse before the appeals process is exhausted (successfully or not). Encouragingly, management reiterated that last week's ruling will not impact BP's share buy-back programme, nor its dividend growth potential, nor indeed its future growth potential, given BP's balance sheet strength (cash of $27.5bn at the end of the second quarter). Our sum-of-the-parts (SOTP) valuation of 750p a share already included $10bn for remaining fines. BP screens very cheaply, on nine times earnings versus 11 times for Shell (RDSA), and at a 40 per -cent discount to our SOTP, compared with Shell's 20 per cent discount. Buy.
