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On Tuesday, January 29, a federal court in New Orleans approved an agreement between BP (BP) and the United States Department of Justice, where the the company agreed to plead guilty to 14 criminal charges and pay $4 billion in penalties for the 2010 oil well blowout and spill in the Gulf of Mexico. The spill caused the death of 11 workers and contaminated hundreds of miles of shoreline, as well as the gulf. Shares of BP will respond positively to this most recent hurdle for the energy giant.

The approval of this agreement is very good news for BP, as many company opponents argued that BP should face heftier fines. Moreover, if the court had not accepted the agreement, the company would have had to endure an undoubtedly long and expensive trial that might have resulted in a far greater penalty. A trial to resolve the remaining civil litigation is scheduled for February 25, also in New Orleans, though a settlement there may also be forthcoming. Further, the company must still resolve its liability related to fines for pollution.

Under the Clean Water Act, the company faces potential civil fines between $5 billion and $21 billion, based on government estimates that roughly 4.9 million barrels of oil spilled from the Macondo well into the Gulf of Mexico. The level of fines to be applied is dependent upon whether the company is found negligent, grossly negligent and/or reckless in the actions that resulted in the spill.

BP has argued that the spill was merely an accident and that it was also partially to primarily the fault of Transocean (RIG), the rig owner and operator, and Halliburton (HAL), which performed the cement work on the well. Earlier this month, Transocean agreed to settle both civil and criminal claims with the federal government for $1.4 billion. Halliburton has not yet reached any related civil or criminal settlement.

Shares of BP declined by about 50 percent in the wake of the disaster, but have gained back about half of those losses in the past three years. BP was forced to divest itself of about $50 billion of assets in order to raise funds for its spill liability. As a result, BP is far weaker of a company than it formerly was, but it is still a behemoth in the business of oil and gas, and it is arguably still one of the most undervalued energy companies when compared to its large-cap energy peers.

BP had also suspended its dividend shortly after those problems started, and did not start paying a dividend again until the first quarter of 2011, at which point it paid out a $0.42 quarterly dividend, or half of the $0.84 it paid out per quarter from mid 2008 until mid 2010. In 2012, BP increased its dividend twice and paid out a $0.54 dividend in the fourth quarter. The company also approved a substantial share repurchase program.

BP has also had issues stemming from its Russian ventures, where it had difficulties with its partners and the government, but those too came to a resolution. In late 2012, BP sold its Russian venture stake in exchange for $12.3 billion in cash and a 20% stake in OAO Rosneft, an integrated oil company majority owned by the Russian government.

Even after selling $50 billion worth of assets in a buyer's market, BP is still the fourth-largest oil company that is not majority owned by a sovereign power, with a market valuation of about $145 billion. The only energy peers that are larger are Exxon Mobil (XOM), the largest such entity with a market valuation of around $418 billion, as well as Royal Dutch Shell (RDS.A) and Chevron (CVX), both of which are currently valued at about $230 billion.

BP's expected liabilities and the company's need to divest itself of assets in a fire-sale manner have resulted in a considerably lesser valuation than these peers. BP has a lower P/E ratio than the above-mentioned large-cap peers, though it should be expected that BP's asset sales would likely result in reduced revenue and earnings growth in the future. Moreover, even though BP's dividend is about 64% of its pre-spill payout, it already has a higher yield than its peers.

Another valuation distinction is that BP's oil and gas reserves are currently valued at a considerably lower appraisal price than are its peer's assets. BP's oil and gas reserves are valued at $7.07 a barrel, which is less than half of the $14.41 that European peer Shell's reserves are valued at, and about 43 percent of the $16.42 at which Exxon's reserves are valued. A large part of the difference is clearly based on the premise that a good chunk of BP's assets were and may still be for sale, resulting in discounted appraising, while the assets of its main competitors are not.

BP's most valuable remaining assets are geographically diverse and include assets in Angola, Azerbaijan and the North Sea, as well as the deep-water asset in the Gulf of Mexico that caused so much of its recent problems. BP's North Sea asset is its most mature of its major ones. Regarding its Gulf of Mexico assets, BP now has seven operating oil-rigs and plans to add more, with the area potentially becoming the most important zone of production for the company. BP also continues to hold a reasonably large stake in its former Russian assets though its 20% stake in Rosneft, which currently is valued at about $13 billion.

Continued appreciation for shares of BP will likely come through the resolution of its remaining claims, as well as probable further dividend increases and share buy-backs, both of which appear probable in late 2013.

Source: BP Continues To Be An Undervalued Energy Large Cap With A High And Growing Yield