More Bad News for BP Stock

It has been a long four years for international integrated oil major BP (BP).

bp stock, oil spill, gross negligenceShares of BP stock still haven’t recovered to their pre-Deepwater Horizon disaster levels of around $60 per share.

That event was one of the worst oil spills in history — with the explosion and resulting catastrophe causing more than 4.9 million barrels of crude oil to spill into the Gulf of Mexico back in 2010. Not to mention the fact that eleven workers died on the rig.

Overall, the issue has cost BP billions in fines, legal fees and settlements with victims. It has also resulted in a virtual garage sale of billions of dollars of prime energy assets.

And yet, today’s ruling could mean more big time troubles for the energy major and BP stock investors. The time to cut and run could be at hand.

A Hard Ruling for BP Stock

One of the major lynch-pins in the entire civil court case against BP and the spill was whether or not they knew what they were doing with regards to their reckless drilling program. Following last year’s trial — which determined that BP, rather than contractors Transocean (RIG) and Halliburton (HAL), was mostly at fault — U.S. District Judge Carl Barbier brought the hammer down on BP stock this week.

Barbier ruled that the energy firm was “grossly negligent” and reckless in not performing necessary safety and leak checks on its Macondo deepwater well. Basically, BP knew what it was doing when it decided to bypass several tests and checks. The Deepwater Horizon hit a pocket of methane gas (called a kick) that was improperly accounted for and sealed. It ignited, causing the explosion and resulting oil spill.

Those two words — “grossly negligent” — also have some pretty nasty repercussions for the energy firm and BP stock shares. Namely, the amount of moola that BP will pay in fines is going to surge — by a lot.

Because BP was found to be “grossly negligent” as opposed to just “negligent”, it opens itself up to a higher tier of fines under the the federal Clean Water Act. Regular standard run-of-mill negligence comes with a maximum of $1,100 in civil fines per barrel spilled. The current ruling increases that amount to $4,300 per barrel spilled.

The next step in this piece of the trial is to determine which oil-spill estimate to use. BP argues that only around 2.45 million barrels were spilled. However, the Fed’s estimate that number is closer to 4.2 million barrels that leaked into the Gulf of Mexico. That larger estimate puts BP’s fine for the Clean Water Act at $18 billion — a costly issue considering that BP only has around $3.5 billion set aside for this particular fine.

And BP isn’t off the hook from other fines and penalties either.

The energy firm is still liable for more than $10 billion in fees under the federal Oil Pollution Act of 1990. At the same time, the ruling throws cold water on BP’s recent attempts to appeal its compensation settlement with victims. Not to mention the pending lawsuits from several Gulf States that will undoubtedly use the ruling to their advantage.

Time To Walk Away From BP Stock

“Grossly negligent” — those two words mean a lot of bad news for BP stock investors, and Wall Street clearly wasn’t prepared for the verdict. BP stock lost nearly 6% when the ruling was announced. That was worse single-day drop since 2010, when the disaster actually happened.

And there’s plenty of reason for more drops in the weeks ahead.

BP may be forced to have another garage sale and sell more assets to pay for its continuing legal liabilities. The problem here is that many of its prime non-core assets have already been sold off. These sales have eroded about one-fifth of its earnings power. So either it needs to accelerate the pace of sales & sell more “less-than-prime” assets at lower prices or it needs to part with some serious core fields and projects to raise cash.

Already, BP’s free cash flows (FCF) are considered tight by many analysts when looking at its hefty capex spending bill. That capex spending is covered by its FCF. However, BP’s hefty 5% dividend isn’t fully covered by the remainder. Factoring in additional legal bills, BP may be forced to crimp the rates of dividend increases because it will need to tap its $27 billion in cash reserves to pay for the spill. That will also hurt new investment — which is needed to boost cash flows.

As a trade, BP stock hasn’t been so bad since the depths of the spill. But for those individuals looking for an investment in the oil patch majors, there are better companies — like Chevron (CVX) or Total (TOT) — which don’t have the legal overhang.

All in all, the issues at the firm continue to make BP stock a “pass.”

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


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/bp-stock-oil-spill-negligent/.

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