Since the notorious Deepwater Horizon accident, BP (NYSE:BP) suffered many headaches because of the accident. The company suffered on multiple levels as it lost money, image and confidence of government and investors. The company lost significant amount of market value after the accident and its market value still hasn't fully recovered.
After the Deepwater Horizon incident, BP started a special trust fund where it would save money to cover the costs related to the accident. Eventually the company decided to ramp up the size of the trust fund near $20 billion; however questions regarding its sufficiency remained. The worries about the company's capability to pay off all the damage related to the accident have been pressuring the stock price down. Can BP put all this behind now that the news of its settlement is in?
According to the latest news, BP reached a settlement with most of the plaintiffs who suffered damages because of the accident in the Mexican Gulf. The settlement includes fishermen, clean up workers and many others, but it excludes federal government as well as several local governments that filed lawsuits against BP. Federal government's charges are expected to be particularly costly. The settlement also excludes BP's business partners such as Transocean (NYSE:RIG), Cameron International (NYSE:CAM) and Halliburton (NYSE:HAL). Currently all BP, Transocean and Halliburton filed lawsuits against each other for the damages suffered in the accident as each side blames the other for the incident. For example, BP sued Transocean for $40 billion. Meanwhile, BP already reached a settlement with 4 of the involved companies, namely, Weatherford International (NYSE:WFT), MOEX Offshore 2007, Anadarko Petroleum Corp (NYSE:APC), and Cameron International.
BP's case against federal and local governments will be centered on violation of pollution laws and the Department of Justice also opened a criminal investigation on the company.
Last September, a report issued by a panel of federal regulators and the Coast Guard put most of the responsibility in the incident on BP, claiming that the company ignored federal regulations, multiple warnings, and attempted to save money rather than making safety the number one priority.
As for the price of the settlement, things are still complicated. At the moment the settlement doesn't have an agreed-upon price and it doesn't have a price-cap either. BP executives expect the bill to be around $7-8 billion and this wouldn't be much of a problem for the company. The company had already paid about $6 billion to thousands of local businesses and individuals that got affected by the incident between 2010 and end of 2011.
Originally BP and the plaintiffs had a court date scheduled for Monday, March 5th 2012. Now that the settlement is reached, the court date will be moved forward. By the next court time, which is not yet determined, a settlement has to be written and presented to the judge so that the settlement can get approval. The final decision lays with Judge Carl Barbier of US District Court of New Orleans.
As a reaction to the settlement, BP's CEO Robert Dudley said: "The proposed settlement represents significant progress toward resolving issues from the Deepwater Horizon accident and contributing further to economic and environmental restoration efforts along the Gulf Coast." BP also announced that its settlement was not a confession of fault in the accident and it would continue to fight its case against Transocean and Halliburton. Transocean issued a statement saying that it would continue to defend itself and fight for its case regardless of how this settlement turns out. Halliburton chose not to comment.
Now back to question, is the drama finally over for BP? The answer is obviously a "no." This settlement will play a major role for BP and it will be an important milestone but the company still has to climb a bunch of mountains.
As for investors, earlier last year BP said it was ready to spend $20 billion on the costs associated with the accident. I would say that the $20 billion to be spent by the company is already baked in BP's share price by now as all investors have heard of it. So far the company spent $6 billion and this settlement ensures spending another $7 to 8 billion. This means the company will have about $6-7 billion more to spend before investors start panicking again. If BP can settle with the government for a price around $6 and end up paying nothing to Halliburton and Transocean, its investors will be ok and business will go on as usual. If the company ends up spending more than $20 billion in total, this may ignite some panic among investors. The best case scenario for BP would be to settle with government for a relatively low price and then have Transocean and Halliburton pay for some of the damages.
Apart from all this drama, BP is one of the most undervalued oil stocks with a P/E value of 6 and price to book value of 1.3. Once the court drama ends, BP's investors might enjoy a new rally as long as another similar accident doesn't occur anytime soon. Given how much trouble the company had to go through because of the last accident, I'm sure it will do everything it can to make sure that doesn't happen again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.