BP Seeks a Potential Cut in Oil Spill Fine

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BP (NYSE: BP) is seeking a reduction of the $3.4 billion fine for pollution caused by the Gulf of Mexico oil spill in 2010. According to the company, at least 810,000 barrels of oil were collected before it spilled into the Gulf, and it should be accounted for while calculating the fine in accordance with Clean Water Act penalties. The officials at BP state that the government has overestimated the size of the spill, and therefore the fine calculated by the authorities is also overestimated. BP has submitted a court filing asking the federal government for the amendment. According to estimates, BP is expected to be imposed a fine of around $20 billion.

BP’s Post-Spill Performance

BP has been on the road to recovery ever since the unfortunate oil spill in the Gulf of Mexico in 2010. The event was of such a massive scale that it cast serious doubts over the survival, let alone prospective growth, of the company. BP’s share price came down from around $60 to $27 in a matter of days, and the company has not reached that high share price ever since. However, BP shows signs of rapid recovery that are reflected in the company’s market and financial performance. In 2010, the company faced an operating loss of $15 billion, and in the very next year it returned an operating profit of $28 billion.

BP has a long way to go until it reaches its prior glory, but there is sufficient evidence that the company is gradually moving towards its previous position. The company has kept its shareholders satisfied with regular dividend payouts which are gradually increasing, and it has also kept the analysts optimistic due to its strong financial performance. For the third quarter in 2012, BP reported an underlying replacement cost profit of $5.2 billion, which was higher when compared to the $3.7 billion reported for the second quarter. BP’s solid financial growth can be attributed to its strong downstream business. The company’s upstream business is also growing at a steady pace, with increased production from new projects. BP has improved earnings per share by 7.6% in the most recent quarter compared to the same quarter in 2011.

The strength of the company can also be evidenced by the pattern of its earnings per share growth over the past two years. In the upcoming year, analysts expect an underperformance with regard to EPS due to the one-off payment of the fine against the oil spill; however, the overall business of the company is expected to grow.

New Upstream Project

BP announced that it has started production from one of its major upstream projects at the Skarv field in the Norwegian Sea. The field is expected to push the overall production of the company, as it will reach around 125,000 barrels of oil equivalent per day (boepd), monthly average rate of 30,000 boepd within the first six months, and 165,000 boepd per day by the year end. This is one of the major projects taken up by the company after the oil spill, and it is expected to help BP speed up the recovery of its business.

This project will also strengthen BP’s position against its competitors. The major competitor of the company is Chevron Corporation (NYSE: CVX). Chevron has had a commendable market performance in the recent past when compared to other firms in the industry. Chevron has been growing at a rapid pace, and the company has reported very positive outlooks for its fourth quarter in 2012. The EPS of Chevron stands at $12.19, which is significantly higher than that of BP at $5.53. In its third quarter in 2012 Chevron’s net profit was $5,253 million, and the company expects an increase in profits in the fourth quarter. Chevron’s performance will not have any significant influence on BP, as BP is gradually gaining back its strength.

Another competitor of BP is ExxonMobil (NYSE: XOM), which is a larger company than both BP and Chevron in terms of market capital. Exxon’s market capital stands at $416.77 billion. However, Exxon’s EPS stands at $9.46, which is lower than that of Chevron, which stands at $12.19. The financial performance of Exxon has also not been as impressive as that of its competition. For its third quarter of 2012, Exxon disclosed net income of $9.5 billion, which was significantly lower than its net income in the same quarter in the previous year, which stood at $10.33 billion. The revenue of Exxon has declined as well. For Q3 2012, the revenue is $111.5 billion, while for the same quarter in the previous year it was $120.4 billion. However, when compared in terms of EPS, the EPS of BP is still lower than both of its major competitors. However, the recovering business of BP will help it enhance its EPS.

Stock Ratings

As mentioned earlier, the analysts are highly optimistic regarding the prospective market performance of the company, which is why BP currently holds 8 ‘buy’ recommendations and ‘5’ hold recommendations. The analysts at TheStreet reinforced their ‘buy’ rating for the company stating that BP holds strength in multiple areas. There has been significant growth in the company’s EPS, which shows that BP is on the right track with regard to its financial performance.

After the analysis of different factors influencing BP’s prospective market performance, in my opinion, investors should buy shares of the company. The rationalization behind this recommendation is that the company is on the road to recovery and so far has shown promising results. From the trend of its financial performance in the last two years, it can be deduced that BP will continue to enhance its financial performance in the upcoming fiscal periods. Although the payment of the fine for the oil spill will reduce BP’s profit for the next financial year, its influence will be isolated from the overall business performance of the company.


muhammadbazil owns shares of ExxonMobil. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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