A final figure has been published for BP’s (LSE: BP) settlement with the US government and five Gulf states over the Deepwater Horizon oil spill.
Following the announcement back in July that BP would pay $18.7bn in fines associated with the spill, it was announced yesterday that final settlement will now total $20.8bn, after the inclusion of interest payments and committed expenditures for early clean-up activities.
Also, the additional costs include $700m for injuries and losses related to the spill that aren’t yet known.
The judgement will become final after a public comment period of at least 60 days. If comments received during the public comment indicate that the judgement is unfair, BP will be dragged back to court.
A final stamp
All in all, this final settlement pretty much puts a final stamp on BP’s Macondo disaster. The company has set aside $53.7bn overall to pay for the disaster and has agreed to pay natural resource fines over 18 years and others over the next 15 years.
In other words, BP will have to pay around $1.4bn per annum to US authorities during the next 15 years. For a company that generated cash from operations of $8.1bn during the first half of this year, this settlement is manageable. Further, at the end of June BP had cash and short-term investments of $33bn.
And with the final tally for the disaster now known, BP’s management can return the company to a growth trajectory. Indeed, 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, and even BP itself could become a bid target. Although, regulatory issues are likely to prevent a takeover by another oil major.
Bright outlook
The settlement brings clarity and certainty for all parties involved. BP will now be able to spend more time on what it does best; finding, producing, developing, and selling oil and gas products.
The company has never been in a better position to grow. During the past five years, BP has significantly narrowed its oil production business and divested non-core assets that don’t generate an attractive return on investment. BP was forced to shed over $40bn of assets to cover the spill’s clean up and litigation costs.
BP can now start reinvesting excess cash, buying high-quality assets to improve long-term returns. As many public oil companies are currently trading at all-time lows, it’s the perfect time to go hunting for bolt-on acquisitions.
Of course, if BP can’t find any attractive acquisitions then the company is likely to hike its dividend payout. BP currently yields 7.4%, and while this payout isn’t covered by earnings per share, the company’s hefty cash balance indicates that the dividend won’t be cut any time soon. BP currently trades at a forward P/E of 16.
