In a development long anticipated by investors, BP Plc (BP, Financial) is rumored to have agreed to a plea deal involving a record U.S. criminal penalty for its involvement in the 2010 Deepwater Horizon disaster. The Deepwater Horizon was an ultra-deepwater, dynamically positioned semi-submersible off shore oil drilling rig owned by Transocean Ltd and leased to BP. In September 2009, the rig made history when it drilled the deepest oil well in history at a vertical depth of 35,050 ft in the Tiber Oil Field, approximately 250 miles south east Houston. On April 20, 2010, the rig made headlines again when an explosion on board killed 11 workers and ignited a fireball visible from 35 miles away. The resulting fire could not be extinguished and the vessel sank, leaving oil gushing from the well and causing what is arguably the biggest environmental disaster in U.S. history.
According to Reuters, sources close to the discussions between BP and the Department of Justice (DoJ) reported that BP would plead guilty in exchange for a waiver of future prosecutions related to the incident. In a statement on Thursday, BP admitted being involved in “advanced discussions” with the DoJ, but refused to comment on details, saying only that no final agreement had been reached.
BP will no doubt be looking forward to concluding months of negotiations with the U.S. government and potentially resolving at least a portion of a large outstanding liability related to the 2010 incident which not only cost the lives of 11 workers and inflicted massive damage on Gulf Coast shorelines, but also saw BP stocks plummet and ended with BP CEO, Tony Hayward’s resignation.
However, given the significance of the rumored settlement, BP could be tasked to dig even deeper in the coming months with the start of civil proceedings scheduled for February 2013, given that the deal would not resolve any civil charges.
Transocean Ltd. (RIG, Financial), owner of the Deepwater Horizon vessel, and Halliburton Co. (HAL, Financial), which cemented the well, also still face potential liability for the incident and would undoubtedly be waiting with baited breath on the outcome of the BP discussions. Particularly since BP’s agreement to such a hefty fine could signify to investors that there was merit in the DoJ’s claim of gross negligence, which if proven during civil proceedings, could see BP paying damages in excess of $20 billion under the Clean Water Act. The DoJ appears confident in its ability to prove charges of gross negligence.
In a scathing brief filed in September, the DoJ asserted that the behavior of BP executives in the days leading up to the disaster “would not be tolerated in a middling size company manufacturing dry goods for sale in a suburban mall.” The brief cites damning evidence, ranging from emails which describe a situation of impending doom exchanged between rig engineer John Guide and his boss David Sims, to failed pressure tests that were ignored and which, if done correctly, could have prevented the disaster.
Investors have been weary of BP stock with the legal drama hanging over the British petroleum giant like the sword of Damocles. Even though investors have undoubtedly been anticipating a large fine, news of a record breaking settlement will no doubt put further downward pressure on stock which is already widely considered to be overvalued. BP stock has dropped more than 4% during the past four days to $40.16 during morning trade on Thursday.
Considering the fact that the stock had been trading in the $60 range prior to the incident in 2010, it is clear that negative sentiment and the impending liability still influenced the company’s perceived value dramatically and investors would most certainly be skeptical of the future with such a hefty potential civil liability still in the works. A fact clearly illustrated by recent communication from analysts and researchers. Sanford C. Bernstein issued a research note on Wednesday (Nov. 14, 2012) in which they reaffirmed BP’s “market perform” rating, setting a target price on the stock of $8.10. This was in line with the views of a number of other analysts who have all been giving BP an “overweight” rating. On Nov. 5, HSBC issued a note to investors, setting a target price of $8.49 on BP stock, while analysts at Societe Generale reiterated their “hold” rating on BP shares and set their target price at $7.74.
Perhaps BP’s outgoing CEO, Tony Hayward, best summed up the position BP finds itself when he announced his resignation on July 27, 2010, “Sometimes you step off the pavement and you get hit by the bus.”
According to Reuters, sources close to the discussions between BP and the Department of Justice (DoJ) reported that BP would plead guilty in exchange for a waiver of future prosecutions related to the incident. In a statement on Thursday, BP admitted being involved in “advanced discussions” with the DoJ, but refused to comment on details, saying only that no final agreement had been reached.
BP will no doubt be looking forward to concluding months of negotiations with the U.S. government and potentially resolving at least a portion of a large outstanding liability related to the 2010 incident which not only cost the lives of 11 workers and inflicted massive damage on Gulf Coast shorelines, but also saw BP stocks plummet and ended with BP CEO, Tony Hayward’s resignation.
However, given the significance of the rumored settlement, BP could be tasked to dig even deeper in the coming months with the start of civil proceedings scheduled for February 2013, given that the deal would not resolve any civil charges.
Transocean Ltd. (RIG, Financial), owner of the Deepwater Horizon vessel, and Halliburton Co. (HAL, Financial), which cemented the well, also still face potential liability for the incident and would undoubtedly be waiting with baited breath on the outcome of the BP discussions. Particularly since BP’s agreement to such a hefty fine could signify to investors that there was merit in the DoJ’s claim of gross negligence, which if proven during civil proceedings, could see BP paying damages in excess of $20 billion under the Clean Water Act. The DoJ appears confident in its ability to prove charges of gross negligence.
In a scathing brief filed in September, the DoJ asserted that the behavior of BP executives in the days leading up to the disaster “would not be tolerated in a middling size company manufacturing dry goods for sale in a suburban mall.” The brief cites damning evidence, ranging from emails which describe a situation of impending doom exchanged between rig engineer John Guide and his boss David Sims, to failed pressure tests that were ignored and which, if done correctly, could have prevented the disaster.
Investors have been weary of BP stock with the legal drama hanging over the British petroleum giant like the sword of Damocles. Even though investors have undoubtedly been anticipating a large fine, news of a record breaking settlement will no doubt put further downward pressure on stock which is already widely considered to be overvalued. BP stock has dropped more than 4% during the past four days to $40.16 during morning trade on Thursday.
Considering the fact that the stock had been trading in the $60 range prior to the incident in 2010, it is clear that negative sentiment and the impending liability still influenced the company’s perceived value dramatically and investors would most certainly be skeptical of the future with such a hefty potential civil liability still in the works. A fact clearly illustrated by recent communication from analysts and researchers. Sanford C. Bernstein issued a research note on Wednesday (Nov. 14, 2012) in which they reaffirmed BP’s “market perform” rating, setting a target price on the stock of $8.10. This was in line with the views of a number of other analysts who have all been giving BP an “overweight” rating. On Nov. 5, HSBC issued a note to investors, setting a target price of $8.49 on BP stock, while analysts at Societe Generale reiterated their “hold” rating on BP shares and set their target price at $7.74.
Perhaps BP’s outgoing CEO, Tony Hayward, best summed up the position BP finds itself when he announced his resignation on July 27, 2010, “Sometimes you step off the pavement and you get hit by the bus.”
