BP, Transocean and Halliburton setting aside billions for possible Deepwater settlement

As the clock ticks ever closer to a civil trial over the Deepwater Horizon litigation, the second quarter 2012 earnings reports have provided some insight in how BP, Transocean and Halliburton are calculating what they might have to pay and how settlement talks are going.

While  estimates of litigation and settlement costs included in financial statements tend to be conservative, companies are required to make some kind of estimate if they can come up with a reasonable one.

BP, which released its quarterly report on Monday, brought its total contingency up to $38 billion, booking an $847 million contingent liability for the second quarter.

It also plans to pay $1.25 billion in the third quarter to fund a $20 billion Deepwater Horizon Oil Spill Trust that the company established to pay individual claims from the Macondo spill. It plans to make a final payment of $860 million in the fourth quarter 2012.

BP acknowledges that its provision includes its own estimates of penalties for Clean Water Act violations, which can vary considerably on the determination of how much oil was spilled and the share of BP’s responsibility for the accident.  It does not, however, include potential liabilities related to the Natural Resource Damage claims under the Oil Pollution Act, arguing that they are not possible to measure at this time.

“It is not possible at this time to conclude whether the $20-billion trust fund will be sufficient to satisfy all claims under the Oil Pollution Act 1990 or otherwise that will ultimately be paid,” BP wrote in its report.

Transocean had booked $1.2 billion for a loss contingency at the end of the first quarter, of which it estimated that $222 million would be recoverable through insurance. It has reported an additional liability contingency of $750 million for the second quarter – a move praised by analysts, who view these estimates as progress in settlement negotiations.

“We continue to think Transocean is well positioned for the January 2013 civil trial for the Macondo oil spill based on the company’s legal successes,” wrote James West, an analyst with Barclays, in an equity note. “Transocean announced an increase to its estimated loss contingency by $750 million. We view this as a sign that settlement negotiations are progressing.”

Halliburton, which booked a $300 million liability in the first quarter of 2012, has not added any additional liability contingencies for the second quarter.

“Although we continue to believe that we have substantial legal arguments and defenses against any liability and that BP’s indemnity obligation protects us, we cannot conclude that a probable loss associated with the MDL (litigation) is zero,” Halliburton wrote in its second quarter 10-Q report. “Given the numerous potential developments relating to the MDL and other lawsuits and investigations, which could occur at any time, we may adjust our estimated loss contingency in the future.”

Halliburton also noted that the Department of Justice is examining Halliburton’s actions after the accident for any possible criminal violations, including record keeping, record retention, post-incident testing and modeling, securities filings and public statements.

There is still time for third quarter earnings reports to come in before the possible trial.