They made a bad deal, and now they've got to live with it. I'm not sympathetic to their plight. They're a sophisticated company with tremendous resources. It was entirely their decision to enter the settlement. They have an obligation to honor it. - Alabama Attorney General Luther Strange
The total cumulative net charge for the incident to date is now $42.4 billion. This includes the cost of the $20 billion trust fund for which a charge was recognized in 2010. At the end of the second quarter, the cumulative amount to be paid from the trust fund has reached $19.7 billion, leaving headroom of $300 million for further expenditures. In the event the headroom is fully utilized, subsequent additional costs will be charged to the income statement in future quarters.
As of September 20, the total business economic loss amount processed is for $2,942,624,221. This is an increase of just over $750 million on 3,443 "payment eligible" claims with still 10 days left to go in the quarter. That comes out to $450 million and growing still yet to be charged to BP's income statement and eventual cash flow. While $450 million is just a drop in the oil barrel for BP, it's just the very beginning of the worst yet to come. Considering the following:
1. There are still 53,070 claims submitted. The average payment eligible claim during Q3 is $217,833 so far. Multiply that by 53,070 and get $11.56 billion.
2. There have been 14,180 new claims for business economic losses filed since the end of Q2 or a 5,310 per month pace. With 7 months to go toward the original deadline of April 22, 2013, that's 37,170 more claims expected at that pace or another $8.1 billion on top of the $750 million and $11.56 billion above for a total of $20.41 billion not accounted for in BP's income statements.
3. Patrick Juneau, the attorney in charge of overseeing BP's settlement, stated that as the deadline for claims of April 22, 2014, approaches, the pace is certain to pick up more. "It's happened in every case I've been involved in, and there's no reason to believe it would be otherwise in this case," he said. This means that if we are to expect a faster pace of claims filed, then my above number of claims is probably too conservative.
4. Now comes the worst part. The original deadline of April 22, 2014 isn't even fixed. The settlement states:
the deadline for submission of Claim Forms to the Settlement Program shall be April 22, 2014 or 6 (NYSE:SIX) months after the Effective Date, whichever occurs later, and the Settlement Program shall remain open through the determination, appeals, and where applicable, payment of all timely submitted Claim Forms.
This means the longer BP drags the settlement in court with various appeals the longer deadline will stay open. One would think that BP would just surrender to get it over with and save on legal bills, but if BP was more careful legally (and operationally for that matter), it wouldn't be in the mess it's in. It appears to be more of the same with BP shooting itself in the foot again while that foot also happens to be in its mouth:
We want everyone to know that we are digging in and are well-prepared for the long haul on legal matters.
Long haul = more time for businesses to file claims. More time = billions more to come out of BP's pocket. The deadline could be extended by 2 years or more before all is said and done. Over time, the claims themselves that are processed may get larger on average as the larger, more complicated claims often take longer to prepare prior to filing and certainly much longer to process. As an example, a mom and pop owned single-location dry cleaner is more likely to be processed more quickly with far less pages of documentation than say Ruth's Hospitality Group (NASDAQ:RUTH) which has by my count 10 different locations (Ruth's Chris Steak House) in the qualifying zone. RUTH's filings so far have yet to mention the BP oil spill settlement so it may be one of potentially thousands of examples of larger claims going through the long process of preparation and processing.
Investors would be wise to pay close attention to the court proceedings and daily statistics. If BP is actually successful in its appeals (for once), it would certainly be quite positive for the company and possibly even drastically reduce its financial woes concerning business economic losses. If however, as I believe, the worst is yet to come, it will have a material impact on BP's bottom line, possibly even forcing it to cut its dividend. I believe my extra $20.41 billion estimate is conservative and doesn't take into account the almost certain deadline extension, acceleration in claims filed, and increased amounts of average claims from larger claims taking longer to process. If BP's circumstance unfolds the way I suggest, BP may become an excellent short candidate.
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.