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Market Yawns at BP’s $4.5 Billion Settlement

Saturday - 11/17/2012, 10:27am  ET

There are a great many ways to react to the news that BP has agreed to accept a $4.5 billion settlement associated with certain litigation related to the Deepwater Horizon disaster in 2010. At first inspection, the number seems enormous, representing roughly 3.5% of the company’s total market capitalization. In another sense, as a penalty for the worst oil disaster in U.S. history – an accident that left 11 people dead – a number that represents less than the company earns in a single quarter does not seem particularly severe. Regardless of which side of this argument you come out on, the market punished the stock less than 2.5% since the announcement making it an interesting play from here.

The Settlement

While the settlement that BP management accepted does not encompass all of the civil suits that are still pending in any number of jurisdictions, it covers the fees and fines by the U.S. Government. Some highlights of the settlement include:

  • $1.3 billion in fines and payments to the government
  • Pleading guilty to 11 counts of wrongful death and lying to Congress
  • $2.4 billion to the National Fish and Wildlife Foundation
  • $500 million to the SEC
  • $350 million to the National Academy of Sciences

The above figures cover cases that directly involve the federal government, but it is estimated that suits involving states and businesses could be much larger. One example includes a federal judge in Louisiana that is considering a nearly $8 billion settlement that would cover various state entities and over 100,000 businesses.

Who is Punished?

While advocacy groups, including Greenpeace, have deemed the settlement insufficient, an important consideration is to trace the impact of the punishment. While the fines, fees and criminal charges will be answered by the company and its employees, significant financial ramifications for the company are likely to have an impact on shareholders. It is difficult to argue that a shareholder does not effectively throw in with the financial fate of the companies that he or she invests in, but the shareholders did not ignore the pressure valves that could have potentially prevented the accident. There should be some tempering of corporate penalties with the interests of guilt-free shareholders.

For those who maintain the belief that big corporations should be held fully responsible for bad acts, regardless of the impact that penalties have on shareholders, I suggest we take this logic one step further. While I absolutely respect the idea that BP can more fully afford to compensate the individuals and businesses of the gulf that have been impacted the most – except for ExxonMobil and Chevron BP is one of largest companies in the industry – many of the people who have been impacted are also shareholders. BP is not only a widely held stock on the individual level, it is widely held by many public and private pension funds and retirement funds. Hurting the company can end up inadvertently further hurting the victims.

I do not really expect this philosophical argument to be easily resolved, but it is worth considering as a small part of a thorough investment analysis.

The Trade

While BP is still facing fairly severe litigation risk, the ability to quantify the cost of a major risk is significant for existing and potential investors. With a dividend yield of 5.4%, you are rewarded for your patience. The fact that the stock was not severely impacted by the news, suggests that much of the risk is priced into the shares. Exxon remains my preferred name in the space, but as of this announcement, BP became significantly more interesting.

This article was originally published as Market Yawns at BP’s $4.5 Billion Settlementon Fool.com

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