BP’s (LON:BP.) share price fall following the New Orleans court’s verdict yesterday on culpability for the Macondo well disaster has been overdone, JP Morgan reckons.
Judge Carl Barbier ruled that “BP’s conduct was reckless,” while its erstwhile partners Transocean and Halliburton were deemed negligent.
Apportioning blame to the culprits, Barbier said BP was 67% at fault, while he ascribed 30% of the blame to Transocean and the rest to Halliburton.
JP Morgan explains that the difference between being deemed grossly negligent, as BP was by Judge Barbier, and negligent is an expensive one for the British integrated oil giant.
“This [distinction] raises the potential fine rate per net barrel of oil spilled to a theoretical maximum of US$4,300/bbl, almost 4x the cap of $1,100/bbl under negligence,” JP Morgan asserts.
BP is appealing against the ruling, as well it might, seeing as, according to JP Morgan’s calculations, at the maximum fine rate under the Clean Water Act (CWA), the potential penalty thus ranges from US$13.9bn, or US$9.0bn if pro-rated to BP’s original interest in the fateful licence, to US$17.6bn (US$11.4bn if pro-rated).
BP carries a balance sheet provision for a potential CWA fine of US$3.5bn. It disputes the US Department of Justice’s view that the net spill volume was 4.1mln barrels (bbl) and reckons the volume was 3.2mln barrels.
Despite all of the above, JP Morgan remains a buyer of BP stock, and thinks the market’s overreaction was due to a focus on a possible incremental liability of US$9bn while failing to adjust for a phased payment mechanism; BP may have US$27.5bn of cash on the balance sheet, but it is unlikely to be asked to pay any fine all at once.
There is also the possibility of an out of court settlement, possibly one that will be at least partially tax deductible, plus there is always the chance that BP’s appeal will succeed.
Based on projected 2014 earnings, BP now trades on an earnings multiple of just 8.9, versus 10.8 for sector peer Royal Dutch Shell.
BP’s dividend yield, at 5.3%, also surpasses that of Shell (4.5%), and its price to book value is currently 1.0, versus 1.3 for Shell.
“Based on our existing forecasts, BP now screens as a very cheap stock,” said JP Morgan, which has a sum of the parts valuation of 750p on BP, currently trading at around 459p.
UBS is more ambivalent, going with a ‘hold’ recommendation, but does note the scale and the timing of the financial impact is yet to be determined.
“This ruling stems out of the first 'Incident' phase of the trial which completed in August 2012. Phase 2 on which a ruling has yet to be published dealt with quantifying the size of the spill. The third and final 'Penalty' phase is scheduled to begin in January 2015,” the Swiss bank notes.
UBS’s price target is 540p.
Investec’s recommendation is also ‘hold’, though its price target is lower still at 440p, down from 460p previously.
“BP has been found guilty of gross negligence. This implies an extra 47p/share in fines although these will not be determined until 2015 at the earliest. But there are also a number of potential offsetting factors, suggesting that market’s reaction (-29p) was about right,” the broker suggests.
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