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BP Finally Resolves Federal Claims - Analyst Blog

Friday, November 16, 2012

BP Plc (BP) finally made its largest ever criminal settlement with the federal authorities regarding the catastrophic 2010 Macondo well oil spill. The incident was a major environmental disaster in U.S. history. The settlement releases BP from a maze of legal uncertainties. The British major can now focus more fully on the remaining civil claims and look beyond the tragedy.

The agreement with the U.S. government calls for the payment of $4.5 billion − including a record $1.25 billion criminal fine in the U.S. − by the British oil giant to resolve all criminal charges leveled by the Department of Justice (DOJ) and all claims by the Securities and Exchange Commission (SEC). All claims with the DOJ would be resolved with $4 billion of payments that is to be made over a period of five years, while all securities claims with the SEC by paying $525 million over three years.

Per the deal, BP has also decided to plead guilty to 11 felony counts of misconduct. The company acknowledged the misconduct of the ships’ officers that led to a loss of 11 lives. Moreover, the company will also plead guilty to one misdemeanor count under the Clean Water Act, one misdemeanor count under the Migratory Bird Treaty Act and one felony count of obstruction of Congress.

The move has undoubtedly taken quite a many by surprise. Few expected BP to make a clean breast of its misdemeanors while settling the claims. The candid admission of guilt helped the shares of BP close nearly 0.4% higher at $40.30 on November 15, a day when not many major oil companies ended on such a positive note.

Despite the optimism surrounding the claim settlement, we remind investors that BP still faces federal civil claims that include Clean Water Act civil claims; federal and state Natural Resources Damages claims; private civil claims that were not covered by the Plaintiff's Steering Committee settlement in April, private securities claims pending in MDL 2185; state economic loss claims; and various private civil claims that are pending in other federal and state courts.

The company said the settlement − which is still subject to approval by the federal court − adds $3.85 billion to the $38.1 billion it has already kept aside to fund for the biggest oil spill ever in U.S. waters. The April 2010 incident in the Gulf of Mexico (GoM) killed 11 workers and leaked 4.9 million barrels of oil into the Gulf over 87 days, polluting shores from Texas to Florida.

BP remains busy in reshaping its portfolio through the divestment of smaller non-core properties to pay spill-related costs, while holding onto potential big resources. Although this move will likely hurt the company’s performance in the near term, it is expected to benefit the oil giant eventually over the long haul.

Recently, BP has shown interest in increasing its stake in the Russian state controlled group – Rosneft – from the existing 1.3%. However, BP’s purchase is contingent on the sale of its stake in a private Russian venture, TNK-BP. The London-based group intends to increase its investment in Russia with the proceeds raised from the potential sale of its 50% stake in the $60 billion joint venture with Russian oligarchs.

Hence, refocused upstream activities with a leading position in the Gulf region following the Macondo incident will definitely help BP in overcoming the near-term tribulations. Notably, the company has already purchased 40 new leases in the Gulf.

BP, UK's second largest oil company by market value after Royal Dutch Shell Plc (RDS.A), carries a Zacks #3 Rank, which is equivalent to a Hold rating for a period of one to three months. We also maintain our long-term Neutral recommendation on the company.


 
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