The oil giant settles claims from individuals and businesses, but the US government is next.
In a deal made 'on the courtroom steps', BP (LSE: BP) has put an end to a huge lawsuit seeking damages on behalf of 110,000 Gulf Coast businesses and individuals.
BP pays $7.8 billion
This morning, BP formally announced that it had reached a settlement with the Plaintiffs' Steering Committee (PSC) overseeing court case MDL 2179 in New Orleans. By doing a deal with the PSC, BP has managed to avoid complex litigation that could take years and cost billions of dollars in legal fees.
This agreement will resolve the 'substantial majority' of outstanding claims for economic loss and medical expenses relating to the Deepwater Horizon disaster of 11 April 2010. However, the proposed settlement is not an admission of liability by BP.
Although the settlement is subject to a final written agreement within 45 days, BP has confirmed that it will pay $7.8 billion to the plaintiffs, with this money coming from the $20 billion Gulf Coast Claims Facility set up by BP in the aftermath of the accident. This includes $2.3 billion towards meeting claims for economic loss related to the economically important Gulf seafood industry.
Before this latest settlement, BP had already spent over $22 billion on repairing the widespread environmental and economic damage caused by accidentally spilling up to five million barrels of oil into the Gulf of Mexico. This includes $8.1 billion paid to individuals, businesses and government bodies, plus $14 billion on operational responses.
Welcoming the settlement, Bob Dudley, BP's chief executive, said: "The proposed settlement represents significant progress toward resolving issues from the Deepwater Horizon accident and contributing further to economic and environmental restoration efforts along the Gulf Coast."
Next stop: the US government
BP confirmed that this proposed settlement is not expected to increase the $37.2 billion charge it has already made to cover the costs of the clean-up. This sum includes the $20 billion trust fund used to meet claims from individuals and businesses, plus other costs such as state and local government claims and response costs, natural-resource damages, and final judgments and settlements.
However, the settlement announced today does not include claims against BP made by the US Department of Justice (DoJ) and other federal agencies (including under the Clean Water Act and for Natural Resource Damages under the Oil Pollution Act), or by the states and local governments.
Under current legislation, BP could be fined $1,100 for each barrel of oil spilled. However, if the DoJ finds BP guilty of gross negligence, then this penalty could be quadrupled to $4,400 per barrel. Given that the first amount comes to $5.5 billion and the second $22 billion, there is a lot riding on this final stage of litigation.
Finally, as I write, BP shares have climbed 1.4% to 503.5p, valuing the oil titan at nearly £96 billion. At this price, this FTSE 100 mega cap trades on a forward price-to-earnings ratio of 7.3 and offers a prospective dividend yield of 4%, covered 3.4 times.
Regardless of the outcome of the US government's legal action against BP, its shares still look too cheap to me.
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