BP ruling sparks relief rally though it faces more years in court

Updated and amended 16th January 2014, 1513pm

BP has received additional qualification about the extent of massive damages it faces for the oil spill in the Gulf of Mexico about five years ago, after the latest ruling on the matter, in a US court overnight.

But the UK’s largest ‘supermajor’ oil company still potentially faces several more years of litigation over the blowout at its Macondo Prospect near the Mississippi Delta, and that’s why the uplift for BP’s shares from last night’s news is fairly modest right now.

To be clear, the ruling on Thursday by federal magistrate Carl Barbier, at the US District Court in New Orleans, decides on only the size of the spill and consequently the maximum potential penalty BP will eventually pay the US government.

The violations are under the Clean Water Act.

The degree of BP’s negligence (“gross”) was decided in September.

BP already pleaded guilty to misrepresenting the flow rate to the US Congress, as part of its $4bn settlement of criminal charges with the Department of Justice in 2013.

Judge Barbier put the size of the worst offshore spill in US history at 3.19 million barrels.

The government argued that 4.19 million barrels was spilled, which could have led to penalties of up to $17.6 billion.

But the ruling was still a third higher than the size pushed by BP itself, and the maximum penalty of $13.7bn would be almost quadruple the spill provisions BP has set aside, even if $4bn less than the maximum the US government wanted.

The Clean Water Act penalties will come on top of more than $42 billion the oil major has set aside or spent for clean-up, compensation and fines. About 810,000 barrels were collected during clean-up.

The penalty will be decided by the judge during a final “penalty phase” of the trial, which will take place in the New Orleans court next Tuesday.

Even after the Clean Water Act fines are set, BP still faces other bills from a lengthy Natural Resources Damage Assessment – which could require BP to carry out or fund environmental restoration work in the Gulf – as well as other claims.

BP shines in under water ‘Big oil’ sector

Not forgetting the small matter of an oil price rout since last summer that’s wiped off more than 50% from crude prices in six months, leaving Middle East and North Africa (MENA) current gross production margins, net of operating costs, around $20 per barrel of oil equivalent.

But BP’s production operating costs are likely to be higher in other regions.

Average industry production costs were estimated $10 to $25 a barrel for conventional supplies from the MENA, the Paris-based International Energy Agency estimated in October last year.

Even factoring the proviso that production costs are a moving target and easy for oil firms to game, the upshot is that there’s little let-up in pressures on the entire oil production complex, including BP.

I’ve argued elsewhere that the necessity for BP to slash costs, re-group and slim down in the wake of the disastrous oil spill had the beneficial effect of putting the supermajor ahead of the industry cost curve.

Additionally, its best-in-class dividend yield will continue to attract institutional investors (AKA, you and I, as pension holders).

But BP’s status as an essential holding has been tarnished of late.

Considered against index compiler MSCI’s stock market index of its peers, the aggregate gained 86% in the last 10 years, compared with a loss of 4% for BP.

The index is still down 26.8% over the last six months though, and BP is down 19.7%.

Oil Futures, BP Plc., MSCI Energy Sector Index rebased to zero

Key

Data from Thomson Reuters

We continue to regard its prospects as relatively attractive for the longer-term, for the reasons above.

BP is liked by the market here, clearly; the stock has traded 4% higher today, with a promising short-term perspective, though there’s no outright bullish signal for more cautious buyers yet.

At a minimum, the title has returned to the relative safety of a long-term channel established early in 2010, certainly at least a sign of relative stability.

City Index’s BP Daily Funded Trade on an hourly view shows the title is in another upswing, after it rallied then paused between mid-to-late December and early this month.

According to the Moving Average Convergence Divergence (MACD) Zero Cross System, attached to the chart within City Index’s AT Pro platform, the long trade has not yet been invalidated, though anecdotally, momentum is already in full-swing.