1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies
Martus Kloppers
Martus Kloppers
Articles (2)  | Author's Website |

Troubled Waters Ahead for BP

November 15, 2012 | About:

In a development long anticipated by investors, BP Plc (NYSE:BP) 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. (NYSE:RIG), owner of the Deepwater Horizon vessel, and Halliburton Co. (NYSE:HAL), 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.”

About the author:

Martus Kloppers
Martus Kloppers is the Director of Ambrose Consulting Services.

Visit Martus Kloppers's Website

Rating: 2.8/5 (9 votes)


Vgm - 5 years ago    Report SPAM
I find your article lightweight and biased against BP.

You mention a random selection of unrelated points about the disaster, taken from disparate sources - all with a negative spin I might add - then begin to talk generally about the BP stock price and go on to quote some analysts. Do you have a view of your own? Do you have an in-depth financial analysis of your own?

And I don't at all see the relevance of your final statement about Hayward regarding the future of BP.

Comes across that you or your company are short BP.
Toponemike - 5 years ago    Report SPAM
This article is the most absurd article I have ever seen. BP makes over 20 Billion pretax easily per year. It's been 2.5 years already, guess what? They already made most of the money back and paying healthy dividends. Even another 50Billion is not going to affect them that much in the long run.
BEL-AIR - 5 years ago    Report SPAM
Even if they were fined $25 billion for all the civil and federal lawsuits, their cash flow from operations could be $20 to $25 billion this year alone.

Plus on top they have almost $120 billion in shareholder equity.

Reminds me of when Buffett bought American Express after the salad oil scandal, and even after the loss American Express still had it's earnings power intact. American Express equity base was even wiped out, still it did not put a dent in the companies ability to earn in the future.

Same thing with BP, it still has it's earning power intact and a cash machine generating up to $25 billion in cash a year from it's operations...

If the price fell below $35 a share I would be a buyer.
Martus Kloppers
Martus Kloppers - 5 years ago    Report SPAM
Thanks for the comments.

I would like to respond to a few points. Firstly @VGM, I have no interest in BP in any way shape or form. I tried to keep my personal views of this whole unsavoury event out of the article as far as possible, for the simple reason that I find BP's actions leading up to, and following the event to be deplorable. Having worked in operations in the oil industry for many years, I can assure you that there is much more to this story than BP is letting on. Personally, I am appalled that no criminal action will be taken against those responsible. Regarding my personal view of the stock, I feel that the stock will lose further value in the short term. I wouldn't buy BP stock right now simply because I would most likely be able to do so at a much lower price in the not too distant future.

@Toponemike and Bel-Air, I do not dispute BP's earning power for one second. I do not believe the company is circling the drain. I do however believe that their stock will take a serious beating in the next couple of months and anybody thinking of investing in BP stocks today should take heed of the various market signals which seem to indicate that others agree with me.

@Toponemike - Keep in mind that even though the disaster happened two years ago, BP has only paid a fraction of the expected compensation for the disaster to date, including the clean-up costs. This fine and the compensation that they'll have to pay following the Civil case are open liabilities which will impact them in the coming months. While I am sure that BP will have provisioned for these liabilities, no business can hand over tens of billions of Dollars without any effect. As stated before, I don't believe the result would be catastrophic, but there will be a result.
Vgm - 5 years ago    Report SPAM
"I tried to keep my personal views of this whole unsavoury event out of the article as far as possible, for the simple reason that I find BP's actions leading up to, and following the event to be deplorable."

This is really what you wanted to say. Why not say it without being forced? It's not an investment thesis but merely an outpouring of emotion.

Caveat emptor!

Please leave your comment:

Performances of the stocks mentioned by Martus Kloppers

User Generated Screeners

pbarker461 Dividend, ptbv, rsi
Doug Taylor<3 pe
nec5555Pat Dorsey Moat 5Y v1
nec5555Pat Dorsey Moat 5Y
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat