BP investors see spill deal narrowing $44 billion gap

BP Plc (BP/) investors said progress toward a settlement with the victims of the Deepwater Horizon disaster signals a share-price rebound, closing the $44 billion gap with the company’s value before the worst U.S. oil spill.

BP rose to a 13-month high above 500 pence in London trading yesterday after the trial to apportion blame for the disaster was delayed by a week to allow time to reach an accord with lawyers representing businesses and residents. The stock may gain a further 15 percent, presuming the company keeps payments for the spill within $10 billion of the $37 billion it has already set aside in costs, said broker Brewin Dolphin Ltd.

“They can probably go a bit above their provision and still get a positive response,” said Colin McLean, chief executive officer at SVM Asset Management, where he oversees 700 million pounds ($1.1 billion) of securities, including BP shares. “The market just wants clarity. There’s lots of pressure to get a deal.”

BP fell 0.3 percent to 500.3 pence as of 8:16 a.m. in London today.

Reaching a settlement with thousands of claimants before the trial begins would be a milestone in resolving the legal disputes arising from the spill and allow Chief Executive Officer Bob Dudley to concentrate on reviving BP’s operations in the Gulf of Mexico, where the London-based oil company was the biggest producer before the accident.

Settlement Talks

On Feb. 26, the day before hearings were due to start in New Orleans, BP and a plaintiffs’ committee said they wanted more time to reach a deal. That settlement would use funds already set aside for victims, according to people with knowledge of the matter. BP is also negotiating with the U.S. Justice Department over fines under the Clean Water Act, where it’s provisioned $3.5 billion. The federal government is also considering criminal charges.

“The shares are being held back by very significant uncertainties,” James Bevan, who oversees $10 billion as chief investment officer of CCLA Investment Management Ltd. in London and holds BP, said in an interview on Bloomberg Television. “The shares will recover significantly if we get good news in terms of an early settlement.”

BP spokesman Robert Wine declined to comment on a possible settlement.

Shares in the London-based company gained 9 percent this year as BP raised its dividend and reported fourth-quarter earnings that beat analyst estimates. Royal Dutch Shell Plc (RDSA), Europe’s biggest oil company, has lost 2.3 percent this year.

BP is still down 24 percent since the day the accident started on April 23, 2010, when it traded at 658 pence, meaning the spill has erased 27.5 billion pounds ($44 billion) of BP’s market value.

Reach Agreements

BP has already reached agreements with some partners and contractors in the Macondo well. The $20 billion fund set up for victims has paid out more than $6 billion. Dudley said this month BP is open to settlements with the U.S., five states, and business and individuals affected by the spill.

“If a deal were to come out that would cost BP about $45 billion, I suspect BP would take it and shares would get to 580 pence,” said Iain Armstrong, an analyst at Brewin Dolphin in London. “It wouldn’t go back to the price pre-Macondo, but the current price would become the base.”

Dudley is targeting $38 billion in asset sales to shore up BP’s balance sheet and says the company will focus on profitability rather than volume in production. The company agreed yesterday to sell natural-gas holdings in Kansas to Linn Energy LLC (LINE) for $1.2 billion.

Dudley said Feb. 7 that cash flow will increase 50 percent by 2014 from 2011 levels. Oil prices have gained about 30 percent since the start of the spill.

Investment Grade

BP would be able to absorb as much as $40 billion of costs related to the spill and still maintain a stable outlook on its A2 debt rating, which is five levels above the lowest investment grade, Moody’s Investors Service said Feb. 24.

The board raised BP’s dividend by 14 percent on Feb. 7 for the first time since the disaster. The payout to shareholders was suspended for three quarters after the spill and reinstated one year ago at half the previous level.

Some analysts caution that settlements could be large enough that BP shares fall. The cost may reach as much as $25 billion in addition to payments already made, making the total cost of the spill higher than provisioned, according to Morgan Stanley & Co. analyst Martijn Rats. Based on BP’s free cash flow, that should value the shares at about 457 pence, he said.

If BP’s costs are below that level, the company may be able to raise its dividend at a faster pace, valuing the shares at about 652 pence, Rats said in a note dated Feb. 23.

New Orleans

U.S. District Judge Carl Barbier is overseeing court proceedings in New Orleans, consolidating thousands of individual claims bought against BP. If the trial goes ahead, he will apportion blame for the explosion of the Deepwater Horizon rig and the spill, which according to the U.S. was more than 4 million barrels of crude. Without a jury, Barbier is set to determine whether BP can get a share of more than $26 billion it has already spent from others involved with the Macondo well.

The U.S. government has sued BP for violations of federal pollution laws. Non-government plaintiffs include fishermen, shrimpers, restaurants, hotels, workers and business and property owners along the coast.

BP has reached settlements with well partners Anadarko Petroleum Corp. (APC) and Mitsui & Co. (8031)’s MOEX Offshore 2007, as well as contractors Cameron International Corp. (CAM) and M-I Swaco. It hasn’t reached agreements with Transocean Ltd. (RIG), the owner of the rig, or Halliburton Co. (HAL), which provided cement for the well.

“With $20 billion to $30 billion extra Macondo cost over and above the provisioned amounted appeared to be discounted in the shares, we believe there is potential for a re-rating for BP,” Alejandro Demichelis, an analyst at Bank of America Merrill Lynch, said in a note.