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And now, catharsis

22 February 2012 By Kevin Allison

BP faces its day of reckoning for Macondo. The UK oil major is preparing for a court case that will determine whether it or any of its partners were grossly negligent in managing the ill-fated well in the Gulf of Mexico in 2010. Such a finding would push the total cost of the tragedy to BP to well above the $43 billion already provisioned. But investors are already pricing in such a scenario. That suggests there is plenty of upside to the shares.

The omens are good for BP right now. Consider Friday’s settlement between the U.S. Justice Department and MOEX Offshore, the well’s 10 percent owner. The Mitsui & Co subsidiary is paying $90 million to settle Macondo-related civil claims – including $70 million to cover alleged violations of the Clean Water Act. Adjusted for MOEX’s stake, that’s about $170 per barrel oil spilled, well below the maximum $1,100 per barrel fine the government might have won in court or up to $4,300 per barrel in the event of gross negligence.

Of course, MOEX held only a financial interest in Macondo. As the public face of the disaster, BP may find it harder to reach its own deal ahead of the start of the civil trial next week. It could settle after the trial begins, but either way it would be a stretch to assume the well’s 65 percent-owner would receive the same favourable terms as MOEX. There’s still also the potential for criminal charges.

Yet BP’s share price of around 500 pence is some 24 percent below pre-spill levels, and 36 percent below where it would be if it had tracked the global oil sector. Interpreting that is complicated by the fact that BP has made other mistakes elsewhere in the world since the spill – notably the botched share swap and exploration deal with Russia’s Rosneft. Assume that these errors impose a 10 percent discount on the shares, and that still means the market is pricing in a colossal gross bill of $72 billion for Macondo – $30 billion above what BP has set aside.

Alternatively, assume BP escapes a gross negligence charge and legal claims for Macondo come in at the $20 billion currently earmarked. That implies a management discount of almost 25 percent on where the shares would otherwise be. For investors who believe the board can – ultimately – regain credibility, that’s a big buying opportunity.


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