Oil spill legal worries still haunt BP investors

Before its Macondo well in the Gulf of Mexico blew out in 2010, killing 11 workers and causing a massive oil gusher at the bottom of the ocean, BP ruled the industry along with other Big Oil titans.

More than three years later, the slimmed-down London oil company is still years away from putting the spill behind it, as protracted legal battles and potential liabilities still haunt the company and its investors.

Even though the company has sold off $40 billion in assets, mostly for liquidity to pay for oil spill costs, the resumption of a civil trial in New Orleans has stirred up renewed investor anxiety about the possibility of $18 billion in pollution fines.

“They don’t want people to focus on liabilities,” said Guy Baber, an analyst with Simmons & Co. International. “In a perfect world, BP would be able to tie a bow around it and put it behind them. Unfortunately for BP and investors, a settlement seems less likely than it did coming into this year.”

The year before the worst oil spill in U.S. history, BP was the world’s top oil producer, but since then it has slashed production 18 percent and fallen behind four other oil giants, according to data compiled by Bloomberg.

The company’s stock still hasn’t recovered from the beating it received in 2010.

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Shares traded on the New York Stock Exchange closed Friday up 25 cents at $42.15 per share — 30 percent less than on April 20, 2010, the day the Macondo well blew out and set off an explosion that destroyed the Deepwater Horizon drilling rig and doomed the 11 workers.

BP’s share price hit bottom at $23.91 in June of 2010. Oil giants Exxon Mobil, Royal Dutch Shell and Chevron have far outpaced BP’s three-year annualized total returns, Bloomberg data show.

And at least one close observer of BP’s legal troubles advises continuing investor caution.

“Wall Street might be unjustifiably optimistic about BP’s ultimate liability in this trial,” said Blaine LeCesne, a Loyola University law professor who has followed the case now on trial in New Orleans. Investors “haven’t relished the news” that BP’s liability could be higher than their original estimates.

Overall, BP could face another $20 billion to $40 billion in remaining legal liability, he said, noting that precise ranges are easier to calculate for some liabilities than others.

Scott Dean, a spokesman for BP, said the company would have no comment on the matter beyond its financial disclosures.

For the past two weeks, U.S. District Judge Carl Barbier of New Orleans has been hearing expert testimony upon which he’ll base a ruling about how much oil spilled and whether the disaster resulted from gross negligence.

If the court rules BP was grossly negligent, it could make the company pay up to $4,300 per barrel of oil spilled into the Gulf.

That would add up to $18 billion if the court agrees with the Justice Department that about 4.2 million barrels were released into the ocean. BP’s experts have testified the spill was about 2.45 million barrels. A barrel is 42 gallons.

In 2012, the company agreed to a settlement with thousands of Gulf Coast residents and businesses claiming economic damages. BP already has paid $3.7 billion in claims under the settlement, according to a court-appointed administrator.

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But the settlement doesn’t set a ceiling on liabilities, making BP’s ultimate cost uncertain, noted Howard Erichson, a law professor at Fordham University.

From a credit rating perspective, the company can manage the $42 million in charges it already has booked for spill-related costs, said Francois Lauras, a senior credit officer at Moody’s Investors Service.

But incremental increases could eat into that headroom, Lauras said.

And the company faces legal entanglements beyond the much publicized settlement with economic plaintiffs and the ongoing trial of claims by other plaintiffs, including federal and state agencies.

Those government entities can seek damages under the Oil Pollution Act of 1990 for the cost of restoring natural resources. That could cost BP $7 billion to $8 billion, LeCesne said.

Governments along the Gulf Coast, including Houston-area municipalities, also can sue under the Oil Pollution Act for economic damages based on sales tax revenue losses. Considering that five states in the region are highly dependent on oil drilling activity in the Gulf, that could generate $2 billion to $3 billion, cumulatively, in government economic loss claims, LeCesne said.

Texas and Florida sued the company earlier this year for lost sales tax revenue and other economic damages, while Louisiana and Alabama are plaintiffs in the ongoing New Orleans trial.

Finally, private parties still could seek punitive damages for land that was affected by the spill but not covered by the 2012 the settlement.

“At the end of the day, this fiasco will cost them close to $70 billion,” LeCesne predicted. “Even BP will feel that.”

Baber of Simmons said LaCesne’s estimate “would be an extremely negative surprise relative to where expectations are.”

And Jason Gammel, an analyst at Macquarie in London, said it’s higher than most investors expect.

In recent months BP stock has outperformed some big names, even as the second quarter was a tough one for the industry, Gammel said.

Transocean engineer: BP abandoned well-capping plan with no explanation

In the courts, some recent rulings have swayed in BP’s favor, and some promise to curb the flow of BP’s increasing payments.

Last week, Judge Barbier suspended some payments under the 2012 settlement after an appeals court agreed in part with BP’s contention that a faulty interpretation of last year’s settlement had given certain claimants undue payments.

BP also scored a court victory in a Texas City case unrelated to the spill but carrying billions of dollars in potential liability. A state court jury said Thursday that BP did not harm three Texas City residents when it released noxious gas from one of its refineries over 40 days in 2010, and the decision could be a benchmark for future cases related to the leak. The plaintiffs were seeking $10 billion in punitive damages.

Geoff Morrell, a spokesman for BP, said the company is preparing for additional proceedings with other plaintiffs.

In August, the Federal Energy Regulatory Commission slapped BP with a $28 million proposed civil penalty, alleging its traders had manipulated the Houston Ship Channel’s natural gas market in 2008.

BP’s Morrell said the allegations “are simply without merit.”

Another lawsuit, this one stemming from allegations that BP and former executives misled shareholders about the level of safety on the Deepwater Horizon, is scheduled to go to trial in Houston next year. Plaintiffs have not pegged a specific amount to compensatory and punitive damages they are seeking, said Richard Mithoff, a Houston attorney representing BP shareholders.

Even as its legal troubles cast a shadow, investors earlier this year had hoped BP’s $55 billion deal with Rosneft, which closed in March, would lift the company’s earnings after BP took a 20 percent stake in the Russian oil giant. But earnings contributions from Rosneft fell about 60 percent below Wall Street expectations in the second quarter.

“It was less than I and others were expecting,” said Gammel, the Macquarie analyst.

“I think the market is looking for BP to start putting more details into its strategic plans,” he said, adding the company is gearing up to make final investment decisions on three major projects this year. BP’s overall strategic message of late has been that it will draw stronger cash flows and higher levels of profit, but “they need to deliver, and they haven’t.”