The Bull vs Bear Case for Investing in BP

The bear’s case

The biggest risk currently facing BP is the mounting pile of claims against the company for its part in the Gulf of Mexico, Macondo oil well disaster.

Unfortunately, claims against BP from individuals and business affected by the disaster are still flooding in at the rate of 10,000 per month, and claimants still have seven months to go until the final deadline.

This indicates the final number of claims against BP could be significantly higher than the present number of 200,000.

In addition, with the average settlement value being in the region of $83,000, the total value of claims against BP could well exceed the $9.6 billion the firm has provisioned for.

What’s more, BP is yet to face the second phase of the court case aimed at determining the company’s liability in the disaster. If found guilty, BP could be liable for between $2.7 and $18 billion in fines, although these fines for the most part, are already provisioned for.

Overall, at the end of the second quarter, BP’s management had provisioned $42.4 billion for spill claims. However, there is still a great amount of uncertainty as to what the final bill to BP for the disaster will be.

The bull’s case

Having said all of that, BP is actually well positioned to pay-off these claims.

Indeed, the company’s $45 billion asset-divestment programme should free up enough cash to cover the vast majority of the spill claims.

In addition, at the end of the second quarter, BP’s net debt was only $18.2 billion, giving a debt-to-asset ratio of 6%, and allowing the company space for additional borrowing if needs be.

But enough about BP’s past, what about the company’s future prospects away from Macondo?

Well, it would appear that BP’s future actually looks promising. So far this year, the company has started drilling and appraisal operations on 31 prospective oil fields.

In addition, BP’s oil and gas production expanded 4% during the first half of this year. In comparison, the production of larger peers Exxon Mobil and Shell declined 2% and 1% respectively.

Furthermore, BP’s recent deal to swap its Russian operations for nearly 20% in Russia oil giant Rosneft has given the company access to a broader spread of potentially more lucrative oil operations within Russia.

Indeed, profits are already flowing into BP’s coffers as BP’s 20% stake in Rosneft generated profits of $85million for BP in the first 11 days of ownership.

Foolish summary                     

All in all, while the uncertainty surrounding the final bill for Macondo-related liabilities could scare some investors, BP still has plenty going for it. BP has plenty of cash to pay off fines, the company’s oil production is rising and debt is low. Overall, the bulls argument looks to be the strongest.

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Rupert does not own any share mentioned in this article.