US Federal Judge Carl Barbier gave BP (LSE: BP) (NYSE: BP.US) shareholders a nasty surprise yesterday afternoon, declaring that the company was guilty of gross negligence for its role in the Deepwater Horizon blowout and resulting oil spill.
The findings open the door to a potential $18bn fine for BP, which said it “strongly disagrees” with Judge Barbier’s finding that in failing to test the Macondo well correctly, the firm was “reckless” and guilty of “wilful misconduct”.
BP shares closed down nearly 6% last night, as the markets reacted with surprise to the finding — many investors, including me, had expected a lesser finding of negligence.
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What’s next?
The gross negligence finding means that BP could now be fined $4,300 for every barrel of oil spilled, rather than $1,100 per barrel in the case of simple negligence.
Additional court proceedings to rule on the number of barrels spilled will begin in January 2015. As you might expect, the two sides don’t agree on how many barrels were spilled — BP says that when allowance is made for its clean-up efforts, the total was 2.45m barrels, but the US government estimate is 4.2m barrels.
These numbers equate to a maximum potential fine of around $18bn, assuming the gross negligence ruling stands. BP has previously only budgeted for $3.5bn of payouts under the Clean Water Act, so a maximum fine would require the firm to come up with some extra cash.
What about BP’s dividend?
BP has long since made it clear that it will fight the US legal process every step of the way. The firm has said it will immediately appeal this decision and the whole process is likely to run for years.
BP’s share price may be volatile in the meantime, but I suspect the firm’s dividend will remain safe, as BP is likely to be able to raise any cash needed for the fines from asset sales, cash flow and debt facilities, without becoming financially stretched.
So is BP a bargain buy?
BP’s 5.3% prospective yield is certainly attractive, but the firm’s share price is likely to remain volatile, and shareholders may need a lot of patience, as the shadow of Macondo is likely to be hanging over the company for many more years.
Remember, four years have already passed since the disaster, and BP and the US government still haven’t even agreed on how much oil was spilled…
