BP Drops as $1.7 Billion Deepwater Charge Surprises: Street Wrap

(Bloomberg) -- BP shares fell the most among European energy companies after announcing a charge of about $1.7 billion as part of the Deepwater Horizon disaster’s class-action settlement. Cash payments related to Deepwater Horizon in 2018 are now anticipated to be about $3 billion, higher than the company’s third-quarter estimate of just over $2 billion.

Although BP said that the charge is fully manageable, BMO Capital Markets analyst Brendan Warn said there’s a risk of “even higher payments.” The stock dropped as much as 2.1 percent, the most since August, and was the biggest decliner on the Stoxx Europe 600 Oil & Gas index.

BMO Capital Markets, Brendan Warn

(Outperform)

Although the size of payments was unexpected, BMO doesn’t see them impacting BP’s share buyback program. The charge will increase BP’s 2018 break-even oil price by about $5 a barrel.

“The magnitude of excess payments in the quarter was unanticipated and we recognize the additional risk for even higher payments.”

The last few remaining claims are likely to be the most complex and substantial, and remaining claims may exceed BP’s expectations.

Jefferies, Jason Gammel and Marc Kofler

(Hold)

While the cash impact will be spread over several years, an incremental $1 billion will be paid in 2018.

“While the incremental cash outflow is a clear negative, the class action settlement is now winding down and we would expect any incremental charges to be minimal.”

The $1 billion payment is equivalent to an increase of about $3 per barrel to Jefferies’ estimate of BP’s organic $56 per barrel break even in 2018. Including all Macondo-related charges and excluding any divestiture proceeds the break-even is about $65 per barrel.

Canaccord, Alex Brooks

(Buy)

“I think it goes into a bucket marked ‘past’ and gets ignored,” Brooks said by email.

Grupo Santander, Jason Kenney

(Hold)

The news is “neutral” for BP because while there’s a “modest” $1 billion increase in charges expected in 2018, claims are near closure, which will bring to an end an extended period of uncertainty for BP’s financials.

Also “on a supportive note,” BP says that it is “back into balance” at $50 per barrel, which is ahead of the previous guidance. Santander had
anticipated this to occur by the end of 2018.

To contact the reporter on this story: Ksenia Galouchko in Moscow at kgalouchko1@bloomberg.net.

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Brian Lysaght, John Viljoen

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