News that BP could be fined $17.6 billion (£10.8 billion) for ‘reckless’ conduct leading to the Gulf oil spill leaves investors sweating over the company's dividend once again.
The 2010 spill, the largest in US history, forced BP to temporarily suspend its divi as it forked out $24 billion to clean up the mess.
The US District Court described the oil giant as 'profit driven' in a 153-page ruling yesterday, with shares plunging by 6% to close at 455p after the company was said to have acted with gross negligence.
At 11am today, shares had recovered 1% to stand at 460p, leaving its market capitalisation around £5 billion lighter since the ruling was issued.
BP said it intends to appeal the gross negligence count, claiming the conclusion ‘is not supported by the evidence at trial’.
Liberum analysts Jean-Pierre Dmirdjian and Andrew Whittock underline the potential implication of this accusation.
‘The market may start to worry about further risks now that BP is labelled "grossly negligent" by the judge,' the pair said.
‘The main concerns could be over BP's ability to continue to operate normally in the US…although there appears no direct link between a legal verdict and oil operations.’
Charles Stanley analyst Tony Shepard added: ‘A gross negligence ruling was not expected and it will give ammunition to other parties seeking damages.’
It is no surprise investors' immediate worry is how this latest bombshell will impact BP’s dividend.
However, Shepard sees no reason to panic.
‘Potential fines should not endanger the dividend,’ he said . ‘Any fines would be payable over a number of years. Furthermore, the appeal process could take months, if not years.’
This view is echoed by Jefferies analysts Jason Gammel and Marc Kofler: ‘Even in the event of a maximum fine, we believe that BP has sufficient liquidity to meet its obligations, the pair said.
‘We further expect that a worst case scenario of fine level would not be paid in the near term; we would expect a lengthy appeals process first. We thus do not believe there is risk to the current BP dividend.’
Buy or sell?
On valuation grounds, BP appears attractive, but the latest uncertainty may test the toughest of contrarians.
Shepard, who has an accumulate rating on BP with a 455p price target, expects the legal uncertainty to overhang BP’s share price in 2015.
But for investors with a longer investment horizon, he believes there could be a decent opportunity.
‘We take a long-term view and we have been encouraged by the operational improvements BP has made and indeed the cash flow targets out to 2018 look positive,’ Shepard said.
Dmirdjian and Whittock were also cautiously optimistic as they repeated their hold rating and 500p price target.
‘Yesterday's decision was another milestone, and appeals may mean it will be years before final penalties are decided and paid,’ the pair said.
‘We do not change our forecasts, which already assume $15 billion of future possible cash out, spread between 2015-17, relating to possible fines payments.
‘We believe BP has the balance sheet strength to meet all fines and see little risk to the dividend.’