BP should be able to meet the cost of up to $18bn of new fines for the 2010 Gulf of Mexico oil spill without major asset sales or a big cut in its dividend, analysts say.
The oil group’s shares dropped nearly 6 percent on Thursday after US district judge Carl Barbier in New Orleans, Louisiana, said it was “grossly negligent” in the April 20, 2010, rig explosion and spill that killed 11 workers.
However, BP said it would appeal the ruling, meaning any decision on indemnities could be years away.
“The headline is obviously negative, but BP will appeal and the appeals process is likely to be dragged out for years,” said Bernard Hodee, analyst at Raymond James, which kept its rating on BP shares unchanged at “fair value”. BP has set aside only $3.5bn for fines under the Clean Water Act, part of a much broader series of provisions for cleanup, compensation and damages that exceed $42 billion.
But it could be liable for up to $17.6bn if its appeal against the “gross negligence” ruling is denied.
“It’s a big hit financially, but not a strategy-altering blow. It would have obviously preferred alternative uses for the funds and it is negative but I don’t think it changes BP’s course. The hard lifting was done in 2010-12,” said Jefferies analyst Jason Gammel, referring to asset sales in those years.
The unwelcome news, at a time when many oil firms are struggling to cut costs in the face of shrinking profits, is unlikely to have much impact BP’s dividend payments in the near-term, as the company had $27.5bn in cash and equivalents on its balance sheet at the end of the second quarter.
“Although this is now a point of high uncertainty for investors, we believe the financial implications of this ruling will remain significantly below the maximum – the Citi estimate is $8.2bn – a sum that should not impact on BP’s ability to fund future growth ambitions nor shareholder dividends,” Citi said in a note, signalling they expect the eventual level of fines will be well short of the $18bn maximum.
It upgraded its BP share valuation to “buy” from “neutral”, raising its price target to 510 pence from 480p.
The case will go on for months or even years with Barbier set to assign damages after the next phase of a civil trial over the accident, scheduled for January 2015. The two earlier phases of the trial looked at how to apportion blame and examined how much oil spilled.