BP Trial Starts, But Legal Limbo Far From Over

Even with trial under way, investors should stay away

   

For besieged BP (NYSE:BP), the moment of truth is here. The remnants of the 2010 Deepwater Horizon drilling disaster, which killed 11 workers and spilled millions of gallons of oil into the Gulf of Mexico, have been haunting the firm for that last three or so years.

Already, BP has spent about $24 billion on clean-up and settlements relating to the spill. BP has also been preparing for additional payments, conducting a yard sale of energy assets in the spill’s aftermath. Since 2010, it has sold roughly $38 billion worth of properties and has placed $42 billion in a fund for spill provisions.

Now, though, the trial determining whether BP or its contractors Halliburton (NYSE:HAL) and Transocean (NYSE:RIG) were “grossly negligent” in causing the accident has begun. Of the thousands of lawsuits against BP that have been placed by individuals, local and state governments and the Feds, this is perhaps the most important. The first phase just started under Federal Judge Carl Barbier in New Orleans and, in the end, a guilty verdict could result in billions of dollars of additional fines against the integrated giant.

Hundreds of attorneys have worked on the case, generating more than 90 million pages of documents, logging nearly 9,000 docket entries and taking more than 300 depositions of witnesses who could testify at trial. Overall, the first phase is expected to last three months.

The Clean Water Act — which was created as a way to punish those who commit environmental harm and prevent future toxic spills — has set provisions on what polluters pay based on just how “guilty” they are. Generally, a company found guilty under the act can expect to pay a minimum of $1,100 per barrel of spilled oil. However, those fines nearly jump up to about $4,300 a barrel for companies found guilty of grossly negligent behavior. In the case of the Macondo Deepwater disaster, a finding of gross negligence would mean that BP is liable for roughly $17.6 billion in Clean Water Act fines.

That verdict would also mean BP is on the hook for an unspecified sum of punitive damages to claimants who weren’t part of the $8.5 billion settlement the company reached last year. For rig-owner Transocean and well contractor Halliburton, that finding of gross negligence would mean the companies can be held liable for punitive damages for all plaintiffs.

However, the legal pain doesn’t end there for BP. This first trial phase doesn’t cover federal government claims and those of Gulf Coast states Louisiana and Alabama. Penalty estimates for environmental damages and remediation costs under that separate federal statute range from $5 billion to $20 billion. BP estimates that the two states are claiming at least $34 billion in damages.

Oh, and it doesn’t include lawsuits against co-defendants. BP, HAL & RIG have all played the blame game and have sued and counter-sued for various damages.

Of course, strong evidence of “a reckless and willful disregard for employee safety and environmental health” would be required to prove gross negligence. Generally, that’s pretty difficult to prove. However, there could be just enough evidence to cite BP and its partners with the verdict.

Various lawyers studying the case have cited the 1970 Ford Pinto Memo as precedence for the Macondo case. While it’s a running joke now, Ford (NYSE:F) was shown to have been aware of a design flaw that allowed the car to explode during a crash. It was also shown to have decided to risk death and injury lawsuits rather than fix the design.

Analysts estimate that BP was under pressure — since the project was already $50 million over budget and severely behind schedule — and followed similar measures in skirting safety requirements and cutting costs when cementing the well shaft. The key piece of “rig-based” evidence was a botched safety test in which two BP supervisors disregarded abnormally high pressure readings. Energy experts will testify that those measurements should have been glaring indications of trouble with the rig well before it got anywhere near “explosion” levels. Basically, the spill was both predictable and preventable.

While I’m no legal expert, the preliminary evidence seems to be in the Fed’s favor. That could be a big issue for BP and its partners as much of their planning — and spill provision funds — rest on the idea that they will be found negligent, but not “grossly” negligent. Overall, BP could have really underestimated the amount of money it needs to cover its future liabilities related to the accident.

Much of my disdain for BP has been this legal cloud hovering above its head. With phase one of the trial finally getting under way, those issues are still up in the air. To me, that still marks BP on the no-buy list until all of this is fully cleaned up.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/02/bp-trial-starts-but-legal-limbo-far-from-over/.

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