The sky may be falling for BP (BP). The US Department of Justice released a report in mid-April stating that the company owes an additional $64 million in payments from the April 20, 2010 Deepwater Horizon oil spill. The report came after the Gulf Coast Claims Facility (GCCF), the $20 billion entity BP set up to process claims stemming from the Deepwater disaster immediately after it happened, was audited. The so-called "significant errors" were identified in the audit and checks are now being sent to the some 7,300 businesses and individuals owed (roughly 3% of the pool of claimants). To date, the GCCF gave out over $6 billion before a case ever went to trial.
Acting associate attorney general Tony West had this to say:
While there's no question that the independent GCCF labored under extremely challenging circumstances to get a huge number of payments processed successfully, the fact that this audit has resulted in tens of millions of dollars being made available to claimants who were wrongfully denied or shortchanged underscores the importance of the audit.
Plus, if the court finds that gross negligence on the part of BP caused the oil spill, it could levy fines as high as $17 billion. But, that isn't the half of it.
In Alabama, Mobile County, Baldwin County, Dauphin Island and Bayou La Batre each filed lawsuits in federal court on April 19 over the Deepwater oil spill, even though settlement negotiations are still underway. The move is to avoid exceeding the two-year statute of limitations for damage claims in place under Alabama law. To date, BP has proposed a settlement of $7.8 billion to cover economic losses by individuals and businesses. Once an agreement is reached, the company will still have to satisfy federal and state government claims. In the case of the aforementioned Alabama counties, they are seeking compensation for lost tax revenue and tourist revenue as well as punitive damages, compensation for any future impact and, of course, the physical cost. If their case is allowed, it could form a precedence allowing local other governments and perhaps even businesses to sue for loss of revenue.
There is another lawsuit facing BP in Ohio. It was filed by Ohio Attorney General Mike DeWine on behalf of four of the state's pension systems - the Ohio Public Employees Retirement System (OPERS), State Teachers Retirement System of Ohio ((NASDAQ:STRS)), School Employees Retirement System of Ohio (SERS) and the Ohio Police and Fire Pension Fund (OP&F). The complaint alleges that BP misrepresented information about its safety practices before the Deepwater spill and about the size of the spill after the disaster. "The BP Deepwater Horizon spill caused the tragic loss of life and extensive environmental damage in the Gulf of Mexico," said DeWine. "Another result of this immense disaster was to Ohio pension systems providing retirement benefits for current and future retirees that invested in BP in good faith and were adversely affected when their stock price plummeted." Again, if approved, this will also likely prove to another case of precedence, opening up the door for other investors to sue for the same.
In other words, it is not over by a long shot and BP could easily end up spending way more that it had originally budgeted, which could spell big trouble for a would-be investor. Last year, BP had an earnings per share of $8.06. As it stands, analysts are expecting BP to earn $7.58 a share this year, falling to $6.80 a share next year. BP's stock price is around $42 right now, which makes its forward price to earnings ratio just over 6. That is certainly low but with shrinking earnings, it better be. BP does pay a decent dividend of $1.92 (4.40% yield) and its payout ratio is just 21%, but even that is not a sure thing. The company's dividends grew consistently from 1995, peaking at 84 cents a quarter in 2010 before falling to half that before the end of the year. The company raised its quarterly dividend to 48 cents earlier this year but there is no guarantee that will hold.
Exxon Mobil (XOM) pays a smaller dividend at $1.88, or 2.20% yield at its recent trade price of $85 a share. Last year, the company had earnings per share of $8.42. Analysts are expecting its earnings to remain flat this year and increase by just 1 cent per share in 2013, making its forward price to earnings ratio 9.46. Its dividends look pretty solid with a payout ratio of 22%, plus they have increased consistently since 2011. Exxon also recently signed a deal that will give it access to Russia's massive oil fields - specifically to reserves in Kara Sea and other areas in the Black Sea - that looks promising.
Chevron (CVX) is paying a 3.10% yield based on its current trade price of $103 a share. It also has a low payout ratio of 23% and a track record for increasing its dividend that stretches back to 1974. Last year, the company earned $13.19 a share. Analysts are expecting that figure to increase to only $13.42 this year, and rise to $13.61 in 2013. At this rate, Chevron is priced low at just 7.55 times its future earnings. Plus, Chevron has a portfolio of "unconventional prospects" that looks promising and relatively greater leverage to global oil prices.
ConocoPhillips (COP) is trading at $73 a share. The company earned $8.76 a share in 2011. Analysts are expecting ConocoPhillips to bring in $8.87 a share this year and $9.19 a share next year. At this rate, the company is priced at just 7.94 times its forward earnings. It also pays a dividend of $2.64 (3.60%), which it has increased since 1989. ConocoPhillips is planning to spin off its refining, transportation and marketing division into a separate company, Phillips 66 (NYSE:PSX), at the end of April, creating two distinct "pure-play" companies - one upstream and one downstream. Already, the new company is talking about amping up production volume by 3-5% a year.
Out of these companies, I like Chevron or ConocoPhillips best. I think BP's future is too uncertain to warrant betting on the company right now - be it as a long position or as a short. Exxon looks good as a long position, but I like to focus on companies that are going to make money from day one. I think Chevron will deliver. ConocoPhillips I like because of the spinoff. The way I see it, the two companies will either thrive because of a new ability to focus operations or one part will flounder and get snapped up by a company looking to expand. Either way, there is money to be made as a shareholder.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.