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Article / 03 July 2015 at 9:52 GMT

BP bites the bullet, but is it poison?

Former managing editor, TradingFloor.com / Saxo Bank
Denmark
  • BP to pay $18.7 billion fine for Deepwater Horizon rig disaster
  • Agreement caps 2010 disaster cost at $54 billion
  • BP shares rise 4% after White House announces deal
  • Oil giant value fallen by $70bn since disaster devastated Gulf of Mexico coastline
  • Clarity on BP now making it vulnerable to predators

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When offshore exploration goes wrong at sea, the consequences can be disastrous as BP discovered after the Gulf of Mexico Deepwater Horizon disaster of 2010. Photo: iStock

By Martin O'Rourke

BP's bitten the bullet and taken an $18.7 billion penalty from the US government to finally bring an end to the DeepWater Horizon blowout saga that killed 11 workers and unleashed 3.2 million barrels of oil on the Gulf of Mexico coastline.

Give or take a few loose ends, the global oil giant has effectively capped its losses at $54 billion (perhaps more effectively than it managed to cap the Macondo well at the time) and finally allows it to draw a line in the sand on the whole saga.

Markets certainly liked it. Shares rose 4% in the immediate aftermath to 437.50 pence and have continued to do so after the European open to reside at 441.15 pence at 0753 GMT.

It's not that difficult to see why. BP may have seen its current provision of just under $44 billion for the disaster raised by $10 billion, but in the hands of the American legal system, the bill could have been a whole lot worse.

For example, a $4.9 billion payment to Alabama, Florida, Louisiana, Mississippi and Texas is nowhere near the $34 billion four of the five states were after two years ago.

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BP shares are up above 440 pence on Friday morning. Source: SaxoTraderGO

And yet....

The very clarity that BP has gained following yesterday's landmark deal could be its Achilles heel. While the global oil giant's future remained shrouded in doubt, its attraction as a potential takeover target was minimal. That has suddenly changed.

BP's value has shrunk by some $70 billion to around the $120 billion mark, a valuation that puts it on the radar of the likes of ExxonMobil, itself a $350 billion-proposition on the global scene.

UK prime minister David Cameron may have vowed to keep BP British but a weakened BP still has global assets that are highly prized even if it has been in sell-off mode for much of the last five years.

And then there is the oil price. Just when BP could do with a fillip from oil markets, the price of the two global benchmarks, WTI and Brent crude both look to be headed towards the downside with little or no chance of respite over the next few months.

"After rallying and then stabilising in a relative tight range the past couple of months, crude oil may struggle to maintain this stability during the coming quarter," says Saxo Bank's head of commodities strategy, Ole Hansen. "Opec has increased production this year in the belief that global demand and reduced non-Opec production, especially from the US, would offer it the ability to recoup lost market share."

"With US production staying resilient despite a big cut in rigs and the seasonal slowdown in refinery demand lurking just around the corner we may well have to get use to crude oil trading weaker during the coming quarter," he says.

With an Iran nuclear deal also in the offing, Iraqi oil production on the rise, the petering out of US refinery demand and question marks over China's demand (so far supportive of oil prices) as the economy continues to splutter, BP's quandary is clear.

Hansen sees some respite though by year-end.

"Brent crude oil might end the year in the $70/b area, some 10 dollars higher than current levels," he says.

Will that be enough to help BP stave off the vultures? Possibly not, which could mean a long hot summer in the BP boardroom as well as 10 Downing Street.

Brent crude was at $61.68/barrel at 0924 GMT. WTI crude was at $56.59/b.

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BP has paid out $4.9 billion to five Gulf of Mexico neighbouring states to help with cleanup costs, much less than the $34 bn four of the five had been demanding. Photo: iStock

Martin O'Rourke is managing editor at TradingFloor.com

4y
fxtime fxtime
LOL I took the gamble (and it is just that a gamble) at 400p (late March) to start scaling a buy and hold sipp position in the very hope of a take-over or div maintenance and eps YoY....although I wish i sold them at 480p in April and rebought at current levels LOL......oil prices are low and supply is high but we have seen this before many times and the commod cycle will gradually turn again as the world is still dependent on oil.
4y
Martin O'Rourke Martin O'Rourke
Of course, if BP does become the subject of a bid from one of the big (bigger) boys, then your set fair fxtime. Hold fast and let's see what a hot summer brings us.....
4y
Martin O'Rourke Martin O'Rourke
Then you are set fair that should be. Hangs his head in shame...!
4y
fxtime fxtime
Is there going to be a Tinkof/Saxo stand at the prologue tomorrow at Utrecht?

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