BP Set to Rise as Spill Settlement Lifts Cloud

By Brian Swint - Mar 5, 2012 7:01 AM GMT+0700

BP Plc (BP/) is poised to gain at least 5 percent this week after a $7.8 billion settlement with victims of the worst U.S. oil spill, an analyst survey showed.

BP shares will probably rise to a minimum of 520 pence from the close of 496.5 pence on March 2, according to the forecasts of five oil industry analysts. Jason Kenney, an analyst for Banco Santander SA (SAN) in Edinburgh, said the stock may climb as high as 580 pence over time if additional spill costs stay within the company’s estimates.

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Photographer: Chris Ratcliffe/Bloomberg

The deal with businesses and individuals, reached after markets closed last week, was lower than the $14 billion that had been discussed, according to people familiar with the talks, and the money for the settlement will come from a $20 billion compensation fund that’s already provisioned for. BP Chief Financial Officer Brian Gilvary said yesterday the company is prepared to settle with the U.S. government for penalties under the Clean Water Act if the terms are fair.

The agreement is “very positive,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. It “could speed up a government settlement and remove this dark cloud that has been hanging over BP for two years,” he said in an e-mailed response to questions.

BP’s market value has dropped by about 29 billion pounds ($45 billion) since the explosion on April 20, 2010, on the Deepwater Horizon rig that killed 11 workers and started the spill. Shares closed at 642.5 pence the day before the disaster.

Pollution Law

London-based BP still faces as much as $17.6 billion in fines for pollution law violations in a suit by the federal government, which will now take the lead in any trial over the spill. U.S. District Judge Carl Barbier in New Orleans yesterday postponed the trial, scheduled to start today, in light of the settlement.

“We remain prepared to settle with others on terms that are fair and reasonable,” CFO Gilvary said on yesterday’s conference call with analysts, echoing comments by Chief Executive Officer Bob Dudley on Feb. 7. “But equally, we’re prepared to go to court.”

Gilvary said it wouldn’t be appropriate to comment on settlement negotiations with federal or state governments. The settlement with individuals and businesses “removes a significant amount of uncertainty for the company in terms of the outlook, but also financially,” he said.

Stuart Joyner, an analyst at Investec Securities Ltd., said shares are about 25 percent below where they would be without the accident. The settlement with victims may push up shares 5 percent, he said.

Stronger Position

“It’s by no means over, but by settling with the largest group, BP is in a stronger position to negotiate with the government,” Joyner said. “BP can say they’ve made it right. The government is after an element of punishment, but if they get too tough it will look like they’re really going after the company, which they said they wouldn’t do.”

BP said the proposed settlement won’t increase the $37.2 billion charge it previously recorded in its financial statements for costs associated with the spill. That figure includes the $20 billion BP set aside for the claims trust fund.

BP would be able to absorb as much as $40 billion of costs related to the spill and still maintain a stable outlook on its A2 debt rating, which is five levels above the lowest investment-grade rank, Moody’s Investors Service said Feb. 24.

The accord provides for a transition from the Gulf Coast Claims Facility trust, through which BP said it has paid more than 220,000 claims from individuals and businesses. The company warned that, although the accord is for $7.8 billion, the $14 billion remaining in the trust may not be enough to satisfy all the costs the fund was created to address.

Earlier Talks

Before the settlement announcement, BP had been in talks with lawyers for spill victims over a deal to be funded by liquidating the remainder of the claims facility, three people familiar with the matter had said.

“The whisper was that the deal would be closer to $14 billion, so if it turns out to be around $8 billion, that’s clearly positive for BP,” said Jason Gammel, an analyst at Macquarie Capital Ltd. in London. “There’s about 30 pence per share of upside. The settlement with the government is still the biggest outstanding item.”

U.S. Attorney General Eric Holder, whose lawyers will now be leading the way in any trial, said Feb. 28 the U.S. has a “strong” case over liability for the explosion.

“We are prepared to go to trial,” Holder said in testimony before a U.S. House Appropriations subcommittee in Washington.

BP set aside $3.5 billion to pay Clean Water Act fines based on its own lower estimate of barrels spilled and no finding of gross negligence, or a conscious act or omission, which would raise the level of penalty per barrel spilled to as much as $4,300 from the $1,100 maximum as a result of simple negligence.

“The share price deserves to be at about 560,” said Iain Armstrong, an analyst at broker Brewin Dolphin Ltd. in London. “It’s still messy, but this is one more step to putting it behind them.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net