‘Worst Case’ BP Ruling to Force Billions More in Payouts – Sep 4, 2014

BP Plc (BP/) faces billions more in potential penalties after a judge found it acted with gross negligence in the 2010 Gulf of Mexico oil spill, dealing a blow to the company’s efforts to expand its drilling program as costs rise and production slips.

In a turning point after four years of legal wrangling over responsibility, U.S. District Judge Carl Barbier’s ruling laid the bulk of the blame on BP for the explosion, which killed 11 men and caused the largest offshore oil spill in U.S. history. Acting with gross negligence means BP will be exposed to as much as $18 billion in additional government fines and penalties. The London-based company has spent more than $28 billion on the accident so far.

BP fell 5.9 percent to 455 pence at the close of trading in London, the most in more than four years.

Related: BP Found Grossly Negligent in 2010 Spill; Fines May Rise

“This opens the window for a worst-case scenario to play out, although this will likely drag out for years,” said Brian Youngberg, an analyst with Edward Jones & Co. in St. Louis. “The legal uncertainty and unrest in Russia are overshadowing the company’s operations in a significant way.”

Barbier found BP’s co-defendants Transocean Ltd. (RIG) and Halliburton Co. (HAL) less responsible for the accident. The judge did not rule today on how much oil was spilled, a key factor in determining the scope of additional fines. The millions of barrels of crude dumped into the Gulf of Mexico harmed wildlife and fouled hundreds of miles of beaches and coastal wetlands.

BP said it “strongly disagrees” with the ruling and would appeal immediately.

Evidence Insufficient

“The finding that it was grossly negligent with respect to the accident and that its activities at the Macondo well amounted to willful misconduct is not supported by the evidence at trial,” the company said in a statement.

Both Transocean and Halliburton fell less than 1 percent at 12:19 p.m. in New York trading.

“BP’s conduct was reckless,” Barbier wrote in a decision today in New Orleans federal court. “Transocean’s conduct was negligent. Halliburton’s conduct was negligent.”

The ruling leaves BP further weakened at a time when the search for crude resources grows riskier and more expensive. Asset sales from Ohio to Pakistan already have shrunk the company as it seeks to pay for the oil spill, which halted deep-water drilling for months and forced explorers to foot the bill for additional safety measures to access oil miles beneath the ocean’s surface. More disposals are probable.

Takeover Pressure

Once one of the biggest and most powerful oil companies in the world, BP faces years more of uncertainty that will put continued pressure on shares and may open the company to takeover pressure from larger rivals such as Royal Dutch Shell Plc or Exxon Mobil Corp.

Today’s ruling defines the scope of the ultimate payouts, which will be determined after a trial scheduled to begin in January 2015 in New Orleans. If Barbier agrees with the government’s spill estimate of 4.2 million barrels, the payout could ultimately be as high as $18 billion based on federal guidelines for pollution fines. If he sides with BP’s estimate that only 2.45 million barrels spilled, it would reach $10.5 billion.

Barbier has discretion in how the fines are ultimately decided.

“During the penalty proceedings, BP will seek to show that its conduct merits a penalty that is less than the applicable maximum after application of the statutory factors,” BP said in its statement.

BP also may be subject to unspecified punitive damages from lawsuits. Legal appeals may prolong the outcome for more than a decade — Exxon paid the final punitive damages from the 1989 Valdez spill off Alaska 20 years after the incident.

Blame Share

Barbier laid 67 percent of responsibility for the deadly disaster squarely on BP’s doorstep. The judge found co-defendant Transocean, owner of the drilling rig, was 30 percent responsible. Halliburton, which also worked on the well, was just 3 percent to blame. Earlier this week, Halliburton said it had agreed to settle most of the lawsuits stemming from its role in the spill for $1.1 billion.

BP had lost more than $3 billion in market value this year as the value of its stake in Russian producer OAO Rosneft (ROSN) has plunged on concerns that conflict between Russia and Ukraine could break out into full-scale war.

“The federal government has extracted more than a pound of flesh in many cases, such as in the aftermath of the financial crisis, but the extraordinary amounts of those fines haven’t reversed the damage that was done,” said Robert Mittelstaedt, dean emeritus of Arizona State University’s W.P. Carey School of Business. “It’s only made them weaker institutions.”

Drilling Impact

Equipment failures and questions about lapses in oversight led to an overhaul of federal regulation governing U.S. offshore safety. The agencies controlling deep-water drilling were reorganized, with new rules put in place to strengthen requirements for equipment, inspections and accident response.

New drilling in the deepest waters of the Gulf of Mexico was shut down for almost a year and permitting of new projects slowed under more stringent federal reviews.

Since deep-water drilling in the U.S. resumed in 2011, BP and its peers have returned to the Gulf of Mexico, where the company is seeking to drill deeper and at higher pressures than before. Gulf oil output rose to 1.3 million barrels a day in May, the highest level since 2011, according to the U.S. Energy Information Administration.

Asset Sales

Before today, BP’s stock had fallen 26 percent since the spill, compared with a 44 percent rise over the same period for Exxon and 34 percent climb for Royal Dutch Shell. Former Chief Executive Officer Tony Hayward was ousted and the company’s dividend was halted after the spill.

Incoming CEO Robert Dudley embarked on a wide-ranging asset sale campaign to raise money and streamline the company. Sales included oil fields in Alaska, natural gas developments in Vietnam and refineries in Texas and California.

The company has set aside $43 billion to pay for cleanup costs and fines. It has about $28 billion in cash hoarded to pay potential costs, enough to ward off questions about its viability in the short term, said Fadel Gheit, an analyst with Oppenheimer & Co. in New York.

“Not only does the company want to get this albatross off their shoulder, they also want to make up for this disaster to shareholders by buying back stock and reducing debt,” said Gheit, who rates the shares the equivalent of a buy.

BP Debt

Even before meeting the cost of any pollution fines BP is more indebted than its competitors. The London-based company has a ratio of debt to earnings before interest, tax depreciation, and amortization of 1.67, compared with 0.9 at Royal Dutch Shell, the largest European oil company, and 0.39 at Exxon.

The cost of insuring BP debt against default is the highest among the largest European and U.S. oil producers by market value.

Investors’ continued wariness can be seen in the income they demand for owning shares. BP’s dividend yield of 4.8 percent is higher than Shell’s 4.6 percent, Chevron Corp.’s 3.1 percent and Exxon’s 2.6 percent.

To contact the reporters on this story: Bradley Olson in Houston at [email protected]; Margaret Cronin Fisk in Detroit at [email protected]

To contact the editors responsible for this story: Susan Warren at [email protected]; Michael Hytha at [email protected]