This Is Why I’d Buy BP plc Today

Does BP (LSE: BP) (NYSE: BP.US) rate as a buy while the outcome of the Clean Water Act trial — which could result in an $18bn fine — remains unknown?

I can’t be certain that I’m right, but I reckon that markets have priced a fair amount of bad news into BP’s share price already, and anything short of a worst-case result could trigger decent gains for BP shareholders.

Let’s look at the facts

BP scored a courtroom victory this week, when it obtained a court order forcing the District Court in New Orleans to stop paying out compensation claims to businesses that couldn’t show they had experienced a loss that could be directly traced to the Deepwater Horizon accident.

This might sound like common sense, but it’s taken BP most of this year to achieve this result. Now that the compensation gusher is under control, BP investors can turn their attention to the possible outcome of this year’s Clean Water Act trial.

The cost of the spill

I believe New Orleans District Court Judge Carl Barbier will find it difficult to prove that BP was guilty of gross negligence in the Gulf of Mexico. If I’m right, and Barbier opts for a lesser degree of negligence, the resultant fine is expected to be somewhere between $2.6bn and $4.6bn, depending on how much oil Barbier decides was spilled (BP claims 2.4m barrels, the US Department of Justice claims 4.2m).

However, if Barbier decides that the evidence during the trial did demonstrate gross negligence, the resulting fine will rise from $1,100 per barrel to as much as $4,300 per barrel, meaning that a fine of between $10bn and $18bn is possible.

In my view, markets will see anything less than $10bn as a positive outcome, which BP can afford to fund out of its existing resources and planned asset sales.

What about BP’s business?

Although BP now has incredible legal firepower, we do need to remember that it is an oil company.

BP’s oil business is doing okay, too. Major new projects in the North Sea and Angola mean that production rose by 3.4% during the third quarter, once the effects of divestments were stripped out, and BP expects the firm’s full-year results to show a similar increase.

Analysts are confident, too, and BP trades on a 2013 forecast P/E of just 10, with a prospective yield of 4.8%.

A share to retire on?

BP remains a quality business, in my view, but the volatility and uncertainty surrounding the company mean that it's not a share I'd add to my retirement portfolio at this time.

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> Roland does not own shares in BP.