In early 2010, British Petroleum (BP) was at the center of one of the worst oil spills in U.S. history, as an explosion on the Deepwater Horizon rig caused millions of gallons of oil to flow into the Gulf claiming 11 lives. Also involved were Transocean (RIG) and Halliburton (HAL), with each company doing their best to escape the weight of the charges. As BP goes on trial, along with Transocean and Halliburton, its stock has been taking a hit as investors hold their breath for the outcome [for more oil news and analysis subscribe to our free newsletter].
As the trial is getting underway, the severity of the case is becoming clear. If Judge Carl J. Barbier finds BP grossly negligent, they “could face fines of up to $17.6 billion under the Clean Water Act,” write Barry Meier and Clifford Krauss. But many are hoping that it will not come to that. According to one attorney, it seems that the best solution for all parties involved is to find a settlement rather than drag out the trial. Should a settlement be reached, the payments from BP would begin much faster and it would save the states a fair amount of money that would otherwise be wrapped up in the prosecution.
A settlement would also avoid further appeals that could be costly for everyone involved. For the time being, it is rumored that a $16 billion settlement has been proposed, with $9 billion for damages, $6 billion in fines under the Clean Water Act, and $1 billion set aside for any unforeseen costs in the future. Note that the company will also be assessed for penalties under a separate federal statute, which could range anywhere from $5 to $20 billion [see also 25 Ways To Invest In Crude Oil].
From BP’s standpoint, they would be better off being slapped with penalties rather than fines, as penalty costs are tax-deductible. Either way, damning testimony and more details of a poorly run operation are coming to light, putting big pressure on BP’s share price.
BP has never recovered to pre-spill levels, but it was able to bounce nicely off of its lows from 2010. However, with losses of 14.7%, the stock has been struggling in the past year, but the past month has been especially hard. As the trial continues, the stock seems to grow weaker, as it has dipped nearly 8% in the 30 days leading up to and including the court case. Compare that to losses of 4% for the United States Oil Fund (USO) and 3.4% losses from industry leader Exxon Mobil (XOM) over the same time period, and it is clear that BP is slipping [see also The Ten Commandments of Commodity Investing].
The company is currently sitting on about $20 billion in cash, which could certainly help alleviate some pressure, but with so many factors at play, it is hard to predict what the finals costs will be. Should BP settle, the stock may finally be able to make its way back up (in time) as it will have the weight of the spill lifted after nearly three years. But with a high profile case such as this, it would not be surprising to see the stock take a further hit; trade accordingly.
Disclosure: Long BP.