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 Shares in the British oil group dropped sharply on Thursday after a
U.S. judge ruled it was "grossly negligent" in the April 2010 rig
explosion and spill that killed 11 workers.
A day later, many analysts said the fall was overdone, pointing out
the level of fines may not be determined for years and that BP could
probably afford to pay them without any major asset sales, or a big
cut to its dividend.
However, some said the bad news could prompt BP to look at reducing
its exposure to Russia at a time when the West is imposing sanctions
on Moscow for its support of separatists in Ukraine, and Russia is
countering with its own restrictions.
"I wouldn't be surprised due to the ongoing crisis in Ukraine and
Russia if BP would like to reduce its huge 19.75 percent stake in
the BP-Rosneft joint venture to cut their risks there, even though
it is profit making," said Natixis analyst Abhishek Deshpande.
BP has said it remains firmly committed to Russia despite the
political crisis as the assets generate up to a quarter of its
global production. It declined to comment on Friday about assets
sales.
Analysts at Citi called BP's Russian exposure an "overhang" and said
that together with the mushrooming costs of the Gulf of Mexico spill
cleanup it was the main reason for the lower share price valuation
of BP versus its oil major peers.
Deshpande said a reduction of BP's Russian exposure would not be
easy and buyers were limited. They could include China, if cleared
by the Kremlin, or Rosneft itself, he said, though the state-owned
Russian oil group could have problems financing a deal given its
limited access to capital because of sanctions.
BP has already divested around $50 billion of assets in recent
years, slimming down to focus its growth on the Gulf of Mexico,
Russia, Angola and the Caspian Sea.
It has set aside provisions of $42 billion for cleanup, compensation
and damages arising from the Gulf of Mexico spill, including $3.5
billion for fines under the Clean Water Act.
Thursday's ruling could make BP liable for up to $17.6 billion under
that act if its appeal is denied, potentially leaving it with a
significant shortfall to make up.
"This decision represents another step in the process, but there is
a long way to go in resolving this issue," BP chief executive Bob
Dudley wrote to employees in an internal memo, seen by Reuters.
BP's stock was up around 1 percent by 1145 GMT, as analysts played
down the immediate impact on the company.
"A lengthy appeals process reduces the net present value of the
fine. We note that Exxon took almost 20 years to settle the 1989
Valdez spill," said analysts from Investec.
Barclays also said it was likely to be a number of years before any
fines were paid. The next phase of a civil trial over the accident
is scheduled for January 2015.
NO DIVIDEND IMPACT
Citi said it was raising its rating on BP shares to "buy" from
"neutral" following Thursday's drop - raising its price target to
510 pence from 480 pence - and S&P also said it was maintaining its
"buy" recommendation.
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BP stock is still down 30 percent since before the 2010 oil spill,
while the UK's benchmark FTSE 100 equities index is up 25 pct over
the same period.
The new ruling comes as oil majors are already suffering pressure
from shareholders to control escalating costs, so BP may have to
take an even harder look at projects before going forward with them.
Besides BP's Russian exposure, analysts have highlighted an Alaskan
natural gas project that could cost $45-65 billion, BP's U.S.
fracking unit that has so far failed to deliver and the Mad Dog 2
platform in the Gulf of Mexico that was put on standby in 2013
because of high costs.
However, the ruling is unlikely to have much impact on BP's dividend
payments in the near term, as the company had $27.5 billion in cash
and equivalents on its balance sheet at the end of the second
quarter.
"We believe the financial implications of this ruling will remain
significantly below the maximum – the Citi estimate is $8.2 billion
– a sum that should not impact on BP's ability to fund future growth
ambitions nor shareholder dividends," Citi said in a note.
Investec said a less quantifiable factor, though, was the impact of
the gross negligence ruling on BP's global reputation.
"Could they find it harder to win new business?,” asked analyst
Neill Morton.
BP could once again find itself excluded from new business with the
U.S. government, including lucrative contracts with the military and
deepwater drilling licences in the Gulf of Mexico. Washington
removed in March a two-year ban on BP that was imposed for "lack of
business integrity." "I'm not buying BP here. The ruling opens up
the door in the United States to more fines for BP," said Beaufort
Securities sales trader Basil Petrides. "The U.S. government has got
its knife out for BP and is sharpening the blade."
(Reporting by Ron Bousso, Dima Zhdannikov and Sudip Kar-Gupta in
London; Editing by Mark Potter)
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