BP Could Clear Massive Overhang With Gulf Spill Settlement

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BP (NYSE:BP) is reported to be seeking a $15 billion legal settlement over the Gulf of Mexico Spill. [1] The settlement with the U.S. Department of Justice, will cover all civil and criminal damages and liabilities arising from the spill. According to FT, the settlement could be reached by September, before the Democratic convention. The U.S. Department of Justice is seeking up to $25 billion from BP for the spill. Seeking a settlement would be advantageous for both the parties as it would eliminate the risk of a trial. BP had earlier reached a $7.8 billion settlement with third party claimants affected by the spill.

We have a $60 price estimate for BP, which is at a 55% premium to its current market price.

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Settlement terms

There is still considerable uncertainty related to the civil and criminal damages and penalties that BP will face over the 2010 Gulf of Mexico spill. According to sources quoted by FT, BP will look to cover all civil and criminal liabilities under the proposed settlement. [1] The company has set aside a sum of $37.2 billion for all the charges related to the Gulf spill. Of special interest is the penalty the company faces under the Clean Water Act. BP estimates that it could face a $3.51 billion penalty under the act, while federal authorities could claim a higher amount, based on the estimate of oil spilled in the accident. [2] The penalty under the act could be much higher if BP is found guilty of gross negligence, a charge that the company has denied vehemently.

A $15 billion settlement could be seen as a positive development for BP. The figure is significantly lower than the $25 billion being demanded by the the DoJ. [1] If the two sides fail to reach an agreement by late summer, the negotiations could drag on till next year, till the trial deadline on January 14th. At present a settlement seems to be the most likely outcome for the multi-billion dollar case.

In the chart below you can see how changes in the spill expenses impact the stock value.

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Notes:
  1. BP seeks $15bn spill settlement, FT [] [] []
  2. Clean Water Act provision, BP []
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