Interactive Investor

BP in play after record £12bn fine

3rd July 2015 12:54

Lee Wild from interactive investor

Finally, five years after the deadly explosion on BP's Deepwater Horizon oil rig in the Gulf of Mexico, the company has settled, in principle, all federal and state claims against it. The final instalment will be up to $18.7 billion, less than many had expected and payable over 18 years. It removes a serious cap on the share price, too, and could rekindle takeover speculation now that the major risk from the Maconda well has been resolved.

Agreements with the Gulf states of Alabama, Florida, Louisiana, Mississippi and Texas include a $5.5 billion fine under the Clean Water Act, $7.1 billion for natural resource damages, $4.9 billion to settle economic claims, and $1 billion for local government claims.

"This is a realistic outcome which provides clarity and certainty for all parties," said chief executive Bob Dudley. "For BP, this agreement will resolve the largest liabilities remaining from the tragic accident."

BP will take an extra $10 billion pre-tax provision with the second-quarter results, due at the end of this month. It totalled $43.8 billion at the end of Q1. Yet the $18.7 billion is $6.7 billion, or 26%, less than analysts at Barclays had pencilled in. That adds 24p per share to the broker's estimate of net asset value (NAV). The lengthy 18-year payment period adds a further 11p.

"The overall impact, along with changes to our estimate of remaining liabilities is to lift our price target to 600p," says analyst Lydia Rainforth. "The certainty that comes from the settlement and a manageable payment schedule should finally enable the company more flexibility in implementing its strategy."

Crucially, the dividend policy set out at the first quarter remains unchanged by the agreement.

"We had targeted a 5.75% yield, a premium to our sector target (5.5%) and reflective of the DWH [Deepwater Horizon] risk," writes Deutsche Bank. "With the risk now priced we move our target to in-line with sector (5.5%) - the equivalent of a 485p price target."

"Resolution via a settlement on terms that, to quote Bob Dudley, represent a 'win-win' for all concerned can, therefore, be seen as little other than a resounding positive."

Bid talk back on

Removing the major threat to BP may also reignite bid interest. BG has already accepted a £47 billion offer from rival Shell, and stubbornly low oil prices are tipped to force further large-scale merger and acquisition activity.

"The much mooted takeover is now more likely - no US company could touch [BP] while it was toxic with litigation- but by no means a certainty," adds oil industry expert Malcolm Graham Wood. "Having tied their hands behind their backs with dividend promises the cash flow situation is not ideal and don't forget that they have the minor matter of Russia to deal with, the Rosneft investment may prove to have been another poor call."

"Potential bidders may have their own Russian investments which could help, but quite a lot of the family silver has been sold off and whilst now undoubtedly more vulnerable, is far from a slam dunk, pencils will be sharpened in A&D departments but with no certainty of action."

What the charts say…

BP shares leapt by over 4% Thursday, and extended gains by a further 8p, or 1.8% Friday morning. But after kissing key technical support at 445p, BP shares now trade flat on the day. Alistair Strang, technical analyst and regular Interactive Investor contributor, explains what's going on.

The share has behaved badly since the Gulf spill with only drops tending to match our calculations with rises tending fizzle out not even half way to target. The surprising thing is the chart actually gives some hope for the future.

The first thing to stand out on the chart is the BLUE downtrend since June last year. As price movements tend to illustrate, this trend has been very deliberately engineered and while the breakout spike to our initial target level of 491p fizzled at 488p, the reversal since has been carefully tended too.

Importantly, the price was not permitted below BLUE, so the share can be viewed as "safe". Near term, we'll be interested if it trades above 445p as this should promote growth to an initial 467p. While in the grand scheme of things, such a movement is useless, if it were to better 467p we'd be quite pleased as it will be outperforming a target on an uptrend. This permits considerable encouragement as the implication is that any further jab at our breakout 491p will probably ignore it and instead continue above.

The next hurdle isn't obvious but it's been painfully evident over the last five years. A Glass Ceiling exists at 517p and only in the event of closure above this level will we be comfortable our 530p thing will soon come into view. And importantly, this will allow a longer term reality to be mentioned as a distant 717p will probably exert an attraction.

Of course, it could all go wrong as the share has not yet met any of the foregoing criteria. Closure below BLUE would be a bad show as it seems the best we should hope for will be a bounce from 388p but goodness knows how long it will take.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.