BP plc’s Spill Settlement Marks The Beginning Of A New Chapter

After nearly five years of court proceedings, it was announced yesterday that BP (LSE: BP) has finally reached an agreement with the Gulf states affected by the 2010 Deepwater Horizon disaster. 

Under the deal, BP will pay $18.7bn to five Gulf states, Alabama, Florida, Louisiana, Mississippi and Texas over the next 18 years.

While this payout is one of the largest ever recorded, it is great news for BP. The company can, at last, start to draw a line under the Gulf of Mexico fiasco and concentrate on rebuilding its reputation, while generating value for shareholders. 

Less than expected 

Under the terms of the deal agreed, BP’s US subsidiary is to pay the United States a civil penalty of $5.5bn under the Clean Water Act payable over 15 years.

Additionally, BP will pay $7.4bn to the United States and the five Gulf states over 15 years for natural resource damages. $4.9bn will be paid over 18 years to settle economic and other claims made by the five Gulf states. And finally, $1bn will be paid to resolve claims made by more than 400 local government entities.

In total, these costs will add another $10bn to BP’s provision for the Deepwater Horizon disaster. The financial cost of the Deepwater Horizon disaster to BP has now reached about $54bn.

Still, the US government was initially seeking damages of around $46bn from BP. So, in many respects, the company got off lightly.

All that remains now is for BP to finalise private sector claims. 

Comfortably affordable

A fine of $18.7bn payable over 18 years is a great outcome for BP and comfortably affordable. The company generated $33bn in cash from operations last year while free cash flow totalled $10bn.

What’s more, the company now has closure on the Deepwater Horizon disaster. With the majority of the costs accounted for, BP can now focus on growth. Management has already stated that with this settlement in place, BP will accelerate the development of the 50 oil & gas projects it currently has in progress around the world. 

Acquisitions could also be on the table. BP could even become a bid target itself now that the uncertainty surrounding a possible settlement has been removed. 

Great time to buy

Now that BP has reached an agreement with the authorities, it draws a line under years of uncertainty, and this is an excellent buying opportunity for investors. 

Indeed, without the overhang from the spill claims, investors can now interpret the City’s projects for BP’s growth, as well as the company’s outlook with an increased degree of certainty. 

Moreover, investors could be set to benefit from higher cash returns. BP has made it a priority to increase its shareholder returns, and a higher dividend payout could follow yesterday’s ruling. 

At present BP supports a dividend payout of 25.8p per share, a yield of 5.8%. City analysts had expected the payout to remain at this level for two years, although now a settlement has been reached, a payout hike could be on the cards.