BP selloff has scope to continue

The sharp drop in BP’s shares yesterday could extend in the near term, judging by the stock’s technical chart.

A day after a US district court judge found the oil major grossly negligent in 2010′s Deepwater Horizon disaster in the Gulf of Mexico, pushing BP’s shares in London 6% lower, there are signs the deep stock sell-off could continue.

Thursday’s judgment opens the door to the levying of an unexpected set of additional fines and damages on top of the  $4.5 billion in fines and penalties, the largest criminal resolution in US history, the British oil group already agreed to pay in relation to the Deepwater Horizon oil spill.

BP Plc. pled guilty to 11 counts of felony manslaughter, two misdemeanours and one felony count of lying to Congress,

BP Deepwater liabilities may need to be recalculated

Fines could now reach the equivalent of $4,300 a barrel set against the oil spillage, rather than the $1,100-a-barrel basis equating to company’s Deepwater penalties to date.

Determinations of how much crude oil BP is deemed to have been responsible for spilling into the Macondo Prospect in the Gulf of Mexico between April 2010 and September 2010, have yet to be completed.

One US brokerage says the spill range could be between 2.4m barrels and 4.1m barrels.

Therefore in the worst case scenario BP could face an additional $17.6bn penalty. This would be five times the amount BP has set aside as provisions (reserves of cash intended to pay for a known forthcoming liability).

Analysts calculate a median point fine in terms of barrels spilled and total penalty would equate to about $8.8bn. Interestingly, the figure equates to the cash wiped off BP’s valuation on Thursday from the share price loss.

BP has said it will appeal the latest ruling.

New judgement adds to BP’s other worries

BP’s unexpected ‘relapse’ into post Macondo crisis mode, of course comes on top of its problems in Russia.

Its stake in Rosneft leaves it with 30% of production exposed to a region in an extremely uncertain situation and being subjected to increasingly severe sanctions.

Investors are therefore primarily concerned over BP’s cash flow. Growth prospects look to be fairly well mapped-out for the next three years, with the firm having sold $3.4bn worth of assets since 2013 out of a planned two-year total of $10bn divestments, in addition to around $40bn worth of assets already sold to help pay for Deepwater.

The bigger issue for shareholders may be BP’s capacity to boost pay-outs even as it continues to tighten costs in response to the new era of higher-basis oil prices and costs.

BP maintained its quarterly dividend of 9.75 cents per share, when it reported second-quarter results in July.

Its next earnings report is due on 28th October.

The stock may well have recouped some of its losses of the last few days by then.

However for now, there seems to be ample room on the downside for further falls.

Selling momentum is greater than buying pressure right now, if the MACD’s signal is accurate—it has crossed below the MACD in a way that would tend to denote a time to sell.

However, after a huge spike in volume on Thursday, perhaps the most pronounced selling has passed, even if the stock still looks pretty vulnerable.

The stock traded about 0.8% higher at 458.5p at the time of writing.