British oil major BP (NYSE:BP) has posted a strong recovery over the past few weeks as it became apparent that the company may be close to reaching a settlement with third party businesses affected by the Gulf of Mexico spill. The markets greeted the news that the company had reached a $7.8 billion settlement deal with the claimants. BP has also benefited from rising oil prices, which are being pushed up because of sanctions being enacted against Iran and because of encouraging economic data in the U.S. Rising oil prices will also benefit oil majors such as Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX).
We have a price estimate of $58 for BP’s stock, which implies a premium of nearly 25% to its current market price. We are in the process of updating our analysis to include these settlements and improving oil prices.
A $7.8 billion settlement was reached between BP and 100,000 claimants suing the company for damages resulting from the spill.   Together with the $6.1 billion that BP has already paid for about 220,000 claims, the company has had to pay quite a bit less than the $20 billion it set aside for third party claims. However, the energy major will still have to deal with civil and criminal penalties imposed by the government because of the damages caused by the spill. BP has estimated that the disaster will eventually end up costing it $37.2 billion. With major uncertainties regarding third party claims being settled, we are readjusting our estimates of the spill costs to reflect the company’s claims. The costs could rise should BP be found to have acted in a grossly negligent manner, in which case civil penalties under the Clean Water Act and other related legislation could almost quadruple.
Oil price rise
Oil prices have rallied in 2012 because of the increasingly uncertain situation in the Middle East and anticipated demand amid the global economic recovery. Oil prices have also increased because of the improving economic picture in the U.S. A rise in oil prices will improve revenues as well as profit margins for BP’s upstream divisions. A deterioration in the Iranian situation could send crude prices up further. Oil and natural gas liquids prices are among the most crucial drivers for BP’s price estimate.Notes:
- Factbox: What’s BP’s potential pricetag for Macondo?, Reuters [↩]
- BP cuts a sweet deal, Market Watch [↩]