BP Might Not Be Worth the Risk Despite Its Potential

BP (NYSE: BP  ) has vowed to keep fighting compensation claims arising from the massive Deepwater Horizon oil spill in the Gulf of Mexico. The problem is that it doesn't believe all of the claims have merit, to the tune of hundreds of millions of dollars. That's a good reason to keep fighting, but it means there's still oil-spill risk. Long-running legal woes aren't uncommon in the oil industry, and if history is any guide, BP has decades to go before this issue is behind it.

A big mess
There is no question that the Deepwater Horizon oil spill was a disaster. The leak, which couldn't be easily contained because it was so far underwater, was front-page news for weeks. And while BP was only one participant in the issue, it was the one that attracted the most attention. So much so that the company's name was changed from British Petroleum to BP -- maybe that wasn't because of the spill, but the timing was pretty suspect.

Another disaster of similar proportion is ExxonMobil's (NYSE: XOM  ) 1989 Valdez oil spill, which also captivated media audiences. However, the Valdez incident in Alaska shows that there is a light at the end of the tunnel. ExxonMobil was able to withstand the blow and grow into an even larger and more powerful company. That said, ExxonMobil's money is still being spent on environmental projects in Alaska more than 20 years after the spill.

The never ending journey
These things have a way of lingering. And that's partially why BP is fighting. It believes that businesses that didn't suffer any damages from the spill shouldn't receive compensation. And it believes that payments that have been made are, in many cases, too generous. If it doesn't fight, the feeding frenzy could become overwhelming.

Of course that belies the fact that as long as BP keeps fighting, it's still paying its lawyers. It's just a part of the process, but it adds up. And while ExxonMobil's settlement payouts show that oil-spill issues can linger for an excessive amount of time and continue to tarnish a brand, Chevron's (NYSE: CVX  ) travails show that even questionable accusations can take on a life of their own.

Chevron's problems stem back to its acquisition of Texaco in 2001. Ecuador accused Texaco of dumping hazardous waste from 1964 to 1992. The case, which involves a nearly $20 billion settlement against Chevron, looks more like a bad legal novel than a real-life court case, which is why Chevron continues to fight, most recently in the U.S. courts.

While Chevron will survive this lawsuit, it's provided 20-plus years of work for the company's lawyers. That's not good news for the expense side of BP's earnings statement.

Already big changes
And BP has already had to make some pretty big changes because of the Horizon spill. For example, the company sold billions of dollars worth of assets to help fund the costs, legal and otherwise, associated with the spill. And with that, its growth profile changed. Some recent growth initiatives have the company working with unreliable global partners like Russia. While it may have made such deals anyway, since most of the easy-to-find oil is gone, the Horizon disaster has pretty much forced it to take a more aggressive approach than it might have before.

It's easy to think that the Horizon issue is in the rearview mirror, but the history of Chevron and ExxonMobil on the oil-spill front suggests four years isn't enough distance to make that claim. BP's around 4.6% yield is enticing when compared to ExxonMobil's 2.5% or Chevron's 3.3%, but the extra risk may not be worth it. And that risk extends beyond legal issues to include the company's business direction after selling billions of dollars in assets. Conservative investors should still be looking elsewhere.

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  • Report this Comment On January 15, 2014, at 10:23 AM, Cryselephantine wrote:

    BP changed its name from British Petroleum in 1998, when it merged with Amoco to become BP Amoco. 12 years before Macondo! Although that didn't stop US commentators (including the president) from referring to the company as 'British Petroleum' during the spill.

  • Report this Comment On January 15, 2014, at 11:43 AM, paulpaz wrote:

    Some basic research about the Chevron Ecuador issue would be nice in this article. Ecuador did not "accuse" Chevron (Texaco) of dumping. Texaco ADMITTED to DELIBERATELY dumping over decades and a CIVIL suit was brought by the affected communities. The case was won. Then held up under appeal and since affirmed by Ecuador's supreme court - for a $9.5 billion judgment. Chevron could never defend itself on the merits since it already admitted to the crime so it has simply attacked the courts as corrupt and spent close to a BILLION dollars fighting rather than cleaning up. It's tactics are so outrageous that a group of close to 30 environmental and human rights organizations including The Sierra Club, Greenpeace USA and 350.org have condemned its actions in a public letter: http://amazonwatch.org/news/2013/1218-chevrons-threat-to-ope... Chevron can't escape the case because the evidence is so completely overwhelming and repeating false allegations made by such a corporation diminishes your publication.

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