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What Is Holding Back BP plc?

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The recent ruling of U.S. District Judge Carl Barbier against BP plc (NYSE: BP  ) on Gulf spill payments is keeping BP from resolving the settlement. But is the uncertainty around this settlement the only issue holding back shares of BP, or are there other causes? 

Oil spill settlement isn't clear 
BP has yet to resolve its $9.2 billion oil spill settlement, as its request to tighten accounting inspections on oil spill claims was rejected. The request was made to avoid fraud and faulty claims, and the ruling is likely to eventually bring BP back to the U.S. Circuit Court of Appeals. Even though the amount of the final settlement isn't clear, BP has allotted a total of $42.5 billion for the 2010 Gulf of Mexico oil spill, including cleaning, paying fines, and compensating businesses and residents for the damages.

If BP is forced to pay more than it had estimated, it could be funded through debt, slowing down its asset purchase program, selling additional assets, or by holding back future dividend payments.. In 2013 alone, BP paid more than $5.4 billion in dividends. So even if BP eventually needs to kick in more to the settlement fund, some of it could be backed by making any of the above-mentioned changes. 

But most of the uncertainty related to this settlement is already priced into the stock. Moreover, it seems that BP's investors believe the worst is behind them, because BP's current valuation isn't far off other oil and gas producers such as Chevron (NYSE: CVX  ) and Royal Dutch Shell (NYSE: RDS-A  ) . BP's enterprise value-to-EBITDA ratio is around 5.7, while the ratios of Chevron and Royal Dutch Shell are 5.4 and 5.5, respectively. Conversely, BP still bears a higher risk as its debt burden is high, even for an oil company: BP's current debt-to-equity ratio is 1.36. In comparison, Chevron's ratio is 0.7 and Royal Dutch Shell's is 1. In recent years, however, BP has reduced its debt burden: Its debt-to-equity ratio dropped from 1.66 at the end of 2011 to 1.36 as of the end of 2013. 

Besides the oil spill settlement, there are other factors that may have contributed to the fall in shares of BP, including the recent decline in the price of oil and the 4.7% drop in its revenue in the last quarter of 2013, year over year. One of the reasons for the decline in sales is BP's progress in the U.S. As an example, it was recently reported that BP lost $654 million in federal contracts (supplying fuel) during 2013. In comparison, back in fiscal year 2012, the company was awarded more than $2.5 billion. This shift has impacted the company's revenue in the U.S. 

But BP isn't the only oil company to record lower sales in the fourth quarter of 2013. Chevron's revenue declined by 4%, while Royal Dutch Shell's net sales fell by 7.5%. 

Bottom line
BP has started off the year on a negative note. The uncertainty over the oil spill settlement is definitely one of the issues holding back shares of BP. But it's not the only one. BP, much like its peers, has suffered from lower oil prices, and showed disappointing quarterly earnings report. 

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Comments from our Foolish Readers

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  • Report this Comment On March 15, 2014, at 7:18 PM, MiningEXPAT wrote:

    I will not disagree with the author on his understanding of BP's financial health. I will point out the gross errors the author has stated as far as BP's legal issues and the condition of the Settlement Agreement in it's progress through the 5th District Court and the 5th Circuit Court of Appeals.

    On Dec. 24th, 2013 Judge Barbier of the 5th District Court GRANTED the relief that BP demanded in their March 2013 appeal. (BP won a victory in requiring matching of revenue income to related expenses in an Oct. 2nd, 2013 5th Circuit Court of Appeals judgement.) BP has now returned to the 5th Circuit Court of Appeals twice more, and has lost both appeals which related to "causation". (Note OPA regulations on "causation" allows for any "affected" businesses in a region or area affected by an oil spill to claim damages.)

    In the Settlement Agreement co-authored by BP itself, BP granted that certain businesses adjacent to the Gulf were exempt from any further requirements to prove causation because of their locations. Other businesses which were in areas close to the Gulf but not adjacent, had to show a direct causal relationship for any losses through a series of objective means tests that would show a temporal set of downturn and upturn in profits over a minimum of 3 consecutive months, during and after the oil spill.

    Please Note that ALL businesses must show losses in a BP approved objective calculation system that requires extensive documentation and proof to verify any losses. BP's sole victory in the 5th Circuit Court of Appeals in Oct. of 2013 was put into a final form by Judge Barbier on Dec. 24th, 2013. Again Please Note that BP DID NOT appeal that ruling by Judge Barbier which was in BP's favor, not against BP as this author erroneously states in this article.

    BP may seek a review of the last two appeals by the 5th Circuit Court full En Banc process (one of these lost appeals BP joined not as a material plaintiff but instead with an amicus brief.) The chances of BP receiving this En Banc review is slight. Two separate 3 judge panels ruled against BP on the same grounds as to causation and their rulings were neatly woven together. One of the panels was itself the same panel that had granted BP their Oct. 2nd, 2013 victory on "matching revenues". The math ofor BP winning enough votes from an En Banc of the 5th Circuit Court of Appeals is dubious at best and BP can win only if the 5th Circuit was indeed to agree to allow BP to join the two appeals.

    The greater likelihood is that BP will lose this request to the 5th Circuit and will instead ask the US Supreme Court to review the cases. This is another high hurdle for BP as they would need 4 justices to agree to review the 5th Circuit decisions which are in lockstep with each other and in agreement with previous decisions from both the 3rd and 9th Circuit Court of Appeals decisions on "similar" cases. Chief Justice Roberts and Judge Kennedy have no real track record of joining to vote to hear such undisputed case from the Circuit Court of Appeals.

    In short BP has a very hard road to stop the current process and they are instead just counting interest dollars with their delay tactics. But then again it is the US courts...anything is possible....

    To the author, you should be ashamed to have so badly misrepresented a fairly easy set of court rulings.

  • Report this Comment On March 16, 2014, at 10:54 AM, liorc wrote:

    The information I have stated in the article was based on facts and available information on the case.

    The recent ruling was taken from Bloomberg and could be found in the following link:

    The response of BP to the 5th court ruling from March 3rd could be found in BP's press release here:

    But the main issue will be whether BP will have to pay more than it had initially estimated. That will determine the company's financial risk and its valuation. For now, it seems unclear but the current valuation of BP suggests its investors aren't too concern over this issue.

  • Report this Comment On March 18, 2014, at 11:26 AM, Africaskies wrote:

    Please check the Bloomberg article as it is itself in error. It is pointed out already in the comments that Judge Barbier's ruling was in regards to releasing Louis Freeh's report for BP to examine, not on a further permanent injunction payments. There is a current injunction in place (though vacated) until the 5th Circuit Court of Appeals issues it's new mandate on March 25th, 2014. As of this morning the 18th March, 2014 BP has filed for an En Banc review of the appeal's court decision from March 3rd, 2014. This action will now extend the injunction on payments until all such appeals are settled.

    It is dangerous to rely strictly on other report's articles for such information and the author here has mistakenly counted on Bloomberg News for their information which is itself factually incorrect. Please refer directly to the 5th District Court in future for such details. FYI the decision of Judge Barbier to deny the BP request for release of documents from Louis Freeh was resisted by Mr. Freeh and was widely reported in the media.

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Lior Cohen

Lior has been a contributor for the Fool since 2012. His main interests are in commodities, and energy and materials companies.You can follow him on Twitter to stay up to date with his industry analysis. @tradingnrg

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