BP received favourable news last week from the publication of the Phase 2 Macondo ruling by the U.S. District Court for the Eastern District of Louisiana. The second phase of MDL-2179 focused on the quantification of discharge, or how many barrels of oil spilled into the Gulf of Mexico during the 2010 incident.
The ruling states that 3.2 million net barrels were discharged, well below the U.S. Department of Energy’s 4.1 million net barrels estimate that had been regularly used to estimate BP’s worst-case Clean Water Act fine of $17.6 billion. By law, the maximum Clean Water Act fine is $4,300 per barrel, which implies that the worst-case fine is now officially $13.7 billion, a $3.9 billion reduction from the previous worst-case outcome.
Our earlier assumption for the fine was $9.4 billion, based on 3.6 million barrels spilled. Updating this assumption to line up with the court's ruling lowers our estimate to $8.3 billion, a $1.1 billion reduction. Our $2,600 per barrel fine assumption has not been altered, as this will be determined by Phase 3 of the trial.
This is unquestionably a positive development, and one that strengthens our belief that the company remains financially well-equipped to handle its Macondo obligations. Relative to its peers, BP today is also on very sound financial footing to support future capital outlays and dividends (the company's yield is currently above 6%). The updates are not overly material to our BP valuation, however. Our fair value estimate and economic moat rating are both unchanged.
For additional commentary on BP's exposure to Clean Water Act fines and MDL-2179. please see our September reports "BP: Examining Gross Negligence" and "BP Updates Investors on Gross Negligence Ruling." A comprehensive overview of BP's Macondo exposure can be found in April's "BP Macondo Handbook (2014 Edition)."
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