Two words were enough to wipe more than £5 billion off BP’s market value late on Thursday. A judge in New Orleans had ruled that BP was grossly negligent, rather than simply negligent, as the company had expected, over its Gulf of Mexico disaster in 2010.
Shares plunged by nearly 6 per cent, the biggest one-day fall since the immediate aftermath of the huge spill.
The verdict means that BP faces paying the maximum fine of $4,300 for each barrel of oil spilt under the US Clean Water Act. Simple negligence would have incurred a fine of about $1,100 for each barrel. BP had set aside only $3.5 billion, assuming that the less serious charge would apply, but now faces having to pay $17.6 billion.
The verdict is certainly a blow, but working out the size of the financial hit is much more complicated. And it will take months — or years — for the final figure to be settled.
First, the short-term implications. BP, despite hoping for the best from the New Orleans judge, has set aside $27.5 billion in cash. It has also moved its gearing rating from the 20 to 30 per cent band typical for the industry to 10 to 20 per cent — it now stands at 16 per cent. If BP had to pay the maximum fine overnight — which it won’t — it could finance it from its balance sheet and still be left with a comfortable 25 per cent gearing.
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The big worry for investors is the dividend. For now, it’s safe. The payout, a mainstay of so many pension funds, was suspended after the Gulf of Mexico disaster. The company knows that cutting it again could fatally undermine investor confidence. In the first quarter this year it raised the dividend by 8.3 per cent to 5.8p. Before the New Orleans verdict, the City had been expecting a similar bump when the company reviews the payout next month. That is looking less likely now.
There are also questions over the $8 billion share buyback that BP announced last year after selling its 50 per cent stake in TNK-BP, the Russian joint venture. Analysts are watching to see whether BP slows or even suspends the buybacks, but believe that this is unlikely.
In the short term, very little changes. True, BP is less likely to announce any shareholder giveaways, but now the waiting game begins. BP will appeal against the New Orleans verdict and that could also delay the third and final phase of the New Orleans trial to determine the size of fines. The company will plead mitigation, probably with some success, for a reduced fine in light of the $37 billion it has spent on cleaning up the spill and compensation.
The verdict of gross negligence also opens up BP to punitive damages from businesses and residents in the Gulf who have not settled with the oil company. Again, these cannot be quantified.
The courtroom machinations in New Orleans are not BP’s only worry. The prospect of tightening sanctions against Russia has cast a pall over the company’s 20 per cent stake in Rosneft, the Kremlin-backed oil group. The mood towards Western investors is souring and could become hostile if relations with the West keep deteriorating. If Rosneft’s earnings are affected, the immediate hit for BP would be limited — last year the British oil company’s share of the dividend amounted to only 2 per cent of group cashflow. But Rosneft is too valuable to lose — analysts value the stake at a hefty 40p, not far off a tenth of BP’s share price.
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A fine of $17.6 billion would cut BP’s share price by about 57p. The fact that shares closed down “only” 28¾p on Thursday shows that the market believes that BP will succeed in halving this fine. Shares also rose by 2 per cent yesterday after analysts said that they were oversold. Given the hostility to BP in the US — not least demonstrated by the New Orleans judge — such confidence appears misplaced. It also doesn’t take into account further punitive damages, not to mention the future of Rosneft.
Max fine $17.6bn
Dividend 5.8p
MY ADVICE Sell
WHY Too much uncertainty over the Gulf of Mexico fines and further damages, as well as doubts over the Rosneft investment in the long term
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