In mid-2010, the world was captivated by the Deepwater Horizon explosion and subsequent oil leak in the Gulf of Mexico. BP (NYSE:BP), which was leasing the rig to drill in the region, was at the center of the firestorm. While it took months to seal the leak, BP's legal woes are far from over, as recent legal setbacks attest.
Getting it behind us
The Deepwater Horizon explosion was a disaster of unprecedented scale, claiming 11 lives and spilling massive amounts of oil. At the time, allegations of wrongdoing were rampant with BP taking blame for being too aggressive in its drilling efforts and rig owner Transocean (NYSE:RIG) being accused of safety lapses.
Both wanted the oil leak and explosion far behind them. That's why each agreed to big dollar payouts. Transocean, for example, agreed to pay $1.4 billion for violations of the Clean Water Act. BP, meanwhile, agreed to a $4.5 billion settlement with the government. In its haste, however, BP also agreed to a $7.8 billion settlement for civil charges.
Of the two, Transocean's shares have been hardest hit. That despite a massive uptick in earnings last year, which went from a loss of over $0.60 a share in 2012 to a profit of more than $3.80 a share. That said, the disaster is the first risk factor listed in Transocean's 2013 annual report and the warnings run for several pages. Essentially, Transocean says that it may not be done paying. No wonder the drag on the shares despite the relative quiet on the legal front.
BP is still in the news, in a bad way
Shares of BP haven't been hit as hard as Transocean's but they, too, remain in the doldrums. Only, at BP the Deepwater Horizon news hasn't trickled off nearly as much. For example, the hasty deal signed on the civil side has allowed questionable damage claims to be paid.
Interestingly, the courts don't deny BP's assertion on this point. In fact, Judge Leslie Southwick noted that, "The settlement agreement does not require a claimant to submit evidence that the claim arose as a result of the oil spill." She explained that the settlement was, "not as protective of BP's present concerns as might have been achievable, but they are the protections that were accepted by the parties and approved by the district court."
In other words, BP didn't read its own fine print. And while it may seem unfair, that's what the oil giant agreed to. But what amounts to a stinging rebuke doesn't mean that BP is giving up the fight. In fact, it just lost another bid to defer payments on questionable claims. That's more legal bills eating into your earnings in a case that BP appears destined to lose because of its own decisions.
But there's good reason to fight. BP estimates that questionable claims could increase its civil outlay by nearly 20% to $9.2 billion. The $1.4 billion increase isn't chump change, even for a company that posted profits of over $23 billion last year. And the legal bills for continuing the fight will, clearly, be less than that sum.
However, the longer BP fights, the longer its name gets dragged through the mud, the longer it has to pay legal fees, and the more you have to worry about the uncertainty that still surrounds the Deepwater Horizon catastrophe. To be fair, BP and Transocean are both getting their businesses back to normal. That said, each still suffers under a cloud.
Transocean appears to be better positioned today than BP on the Deepwater Horizon front. However, this event isn't fully behind either company as BP's continued legal wrangling shows. Conservative investors are better off looking elsewhere.
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Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Transocean. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.