There's been a lot of misinformation and myths floating around regarding the BP (NYSE: BP) settlement for business economic losses. As people get more educated and informed about the details, claims are starting to pour in at an accelerating pace, as they should. The purpose of this article is to clear up some of the bad information out there and allow investors to be better informed so that they may weigh the risks against BP better and brace for more claims.
Reason #1: It is not a lawsuit, it's a settlement administered by an unbiased, third-party claims administrator that BP itself selected.
Businesses in the "economic damaged zones" (any county in Florida that touches the Gulf, all of Louisiana, all of Mississippi, and all of Alabama) are beginning to realize that to file a claim basically just means to collect their fair share. There is no litigation. They don't have to "prove" damages. BP recognizes that it devastated the economy of the Gulf region and if a business fits the economic a formula that BP created, then BP's settlement says it is entitled to compensation and only have to show basic financial records (tax returns and profit/loss statements) and little more to collect what they're entitled to. To not file is to leave money on the table that BP already agreed to pay out.
Reason #2: The average settlement is sizable.
As of this writing, the average settlement amount for business economic losses is $247,376.58. Many businesses are waking up to the magnitude of the settlement check size. This is because the settlement is not only designed to replace lost income, but there are various multipliers in place to replace potential years of lost income including new effects from the spill that may not even be known yet. It's also designed to add a punitive "punishment" component to hold BP accountable and make sure this type of thing never happens again with BP or any other oil company. Those who don't file a claim aren't doing their part to hold BP accountable.
Reason #3: BP chose profits over people.
BP pled guilty to 11 counts of manslaughter and paid a $4 billion fine, the largest (by far) criminal fine paid by anybody in history. What many people and businesses didn't realize is that this wasn't just an accident, but a calculated "gamble" by BP where it risked the lives and environment to save a few bucks. In BP's own words:
"Our guilty plea makes clear, BP understands and acknowledges its role in that tragedy, and we apologize - BP apologizes - to all those injured and especially to the families of the lost loved ones. BP is also sorry for the harm to the environment that resulted from the spill, and we apologize to the individuals and communities who were injured."
BP, along with Halliburton (NYSE:HAL), "used unstable cement to seal the well, and that the mixture had failed multiple tests in the weeks leading up to the disaster" but decided to use it anyway to save money. Then BP decided to use six centralizers, rather than the 21 recommended by Halliburton engineers, once again to save money. The day before the disaster an engineer with BP was warned of possible danger from the lack of adequate centralizers, and his response was "Hopefully the pipe stays centralized due to gravity, it's too late to get any more product on the rig, our only option is to rearrange placement of these centralizers." BP was warned over and over again of possible danger, ignored it, and purposely chose more dangerous and cheaper options. As one of many examples, BP chose to cancel a cement test the morning of the explosion to save $118,000.
Reason #4: Long-term effects sea life population is starting to rear its ugly head.
According to this report, as a result of the oil spill, effects such as shrimp are being born without eye sockets, fish with lesions and blue crabs being born without claws are becoming more common. The spill's domino effect is starting to spread in a way that affects everybody as the price of seafood spikes with such a lower supply available of Gulf shrimp and blue crab. As businesses realize the long-term damage this spill really caused, they can do their part to hold BP accountable and file a claim.
Since BP itself didn't see its large legal bill coming, how can investors? Investors should proceed with extreme caution, as claims are being filed at an alarming rate. BP itself admitted on July 30 that its $20 billion fund it set aside to pay claimants will soon run out and will have to start making new charges to its income statement. As I've stated in my first and thereafter articles, this settlement could potentially spiral up so high that it brings BP to its knees. To make matters even worse, the original April 22, 2014 deadline to file new claims will likely be extended by months or even years. This means even more money out of BP's pocket and even more uncertainty for investors. At the very least, investors would be wise to watch the daily claims updates on this site here that is maintained by the third-party administrator to get an edge on the developments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.