BP Still Facing Financial Liabilities Despite Recent Good News

BMI View: The recent announcement that BP will be allowed to sign new leases to drill for oil and gas in the Gulf of Mexico is a positive signal, representing a significant step in the company's climb back to normality in the wake of the 2010 Deepwater Horizon oil spill. That said, with continued uncertainty about the extent of the company's financial liabilities from the disaster still unknown, we believe that it continues to face significant headwinds from the incident.

The US has agreed to end a suspension on BP, allowing the supermajor to once again bid on lucrative federal contracts and seek licenses for oil exploration in federal land. Originally imposed in 2012, the ban was put into place shortly after the company pled guilty to a number of offenses as part of its US$4.5bn criminal charges settlement with the Department of Justice. The recently signed agreement with BP, ending the suspension, will last five years and forces the company to comply with a set of safety and corporate government requirements as well as retain an independent auditor who will conduct an annual compliance review and report to the EPA.

The agreement is a milestone for the company. It not only represents another step for BP in putting the disaster behind it in a symbolic sense, but more practically means potential for substantial new business for the company. The deal comes too late to allow BP to renew its fuel supply contract with the US Department of Defense, which expired in 2013 and was worth US$2.1bn. However, it will allow the company to once again begin to grow its foothold in the Gulf of Mexico through the acquisition of new oil and gas leases. Indeed, while BP has been able to continue operating its older leases, it has been unable to bid on new ones in a place which CEO Bob Dudley has recently described as one of the company's four 'key' areas. In this regard, the deal is very good news for BP as it comes just in time for a planned March 19 th auction in the Gulf, covering more than 40mn acres, though we note that BP has not commented yet as to whether it plans to take part.

Still Off Its Past Highs
BP Share Price, GBp

BP Still Facing Financial Liabilities Despite Recent Good News

BMI View: The recent announcement that BP will be allowed to sign new leases to drill for oil and gas in the Gulf of Mexico is a positive signal, representing a significant step in the company's climb back to normality in the wake of the 2010 Deepwater Horizon oil spill. That said, with continued uncertainty about the extent of the company's financial liabilities from the disaster still unknown, we believe that it continues to face significant headwinds from the incident.

The US has agreed to end a suspension on BP, allowing the supermajor to once again bid on lucrative federal contracts and seek licenses for oil exploration in federal land. Originally imposed in 2012, the ban was put into place shortly after the company pled guilty to a number of offenses as part of its US$4.5bn criminal charges settlement with the Department of Justice. The recently signed agreement with BP, ending the suspension, will last five years and forces the company to comply with a set of safety and corporate government requirements as well as retain an independent auditor who will conduct an annual compliance review and report to the EPA.

The agreement is a milestone for the company. It not only represents another step for BP in putting the disaster behind it in a symbolic sense, but more practically means potential for substantial new business for the company. The deal comes too late to allow BP to renew its fuel supply contract with the US Department of Defense, which expired in 2013 and was worth US$2.1bn. However, it will allow the company to once again begin to grow its foothold in the Gulf of Mexico through the acquisition of new oil and gas leases. Indeed, while BP has been able to continue operating its older leases, it has been unable to bid on new ones in a place which CEO Bob Dudley has recently described as one of the company's four 'key' areas. In this regard, the deal is very good news for BP as it comes just in time for a planned March 19 th auction in the Gulf, covering more than 40mn acres, though we note that BP has not commented yet as to whether it plans to take part.

Macondo Still A Headwind For BP

That said, with the company still facing huge potential liabilities from a civil trial in New Orleans, we believe the disaster still represents a massive headwind for BP. At this stage, two of three stages of the New Orleans trial - respectively apportioning the blame for the spill and establishing the size of the spill - have already been completed. However, the third phase, to determine the amount of damages the company is liable for, is only just beginning. Under the Clean Water Act, if BP is found to have been grossly negligent, fines could be set at up to US$4,300 per barrel spilled, leaving the company responsible for up to US$20bn.

Simultaneously, the company is also struggling to contain the economic fallout after a federal appeals court rules that it would have to uphold its 2012 compensation payout agreement. Specifically, a US Fifth Circuit Court of Appeals judge ruled that the original 2012 settlement (which BP had agreed to but then revoked) should be allowed to stand, even if it means that payments will go to claimants who suffered no loss as a result of the spill. While the company had initially estimated losses at US$7.8bn, it has already boosted expected losses to US$9.2bn, and has indicated there is potential for significant further increases in required payments.

Still Off Its Past Highs
BP Share Price, GBp

Ultimately, the deal is likely to buoy investor sentiment, and could see a bounce for the company's share price. However, given both the substantial divestments the company was forced to make in the aftermath of the disaster and the continued uncertainty over the full extent of the firm's financial liabilities, it appears BP still has a significant way to climb to reach previous highs.

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