BP settlement raises hopes for the future

Deepwater Horizon oil rig in flames after explosion The final cost to BP of the oil rig disaster will be much lower than first feared

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Last month BP chief executive Bob Dudley told reporters that the oil giant's future lay in "playing to its strengths".

As sound-bites go, it wasn't particularly inspired. What executive would ever say otherwise?

Except that for two years BP has been anything but strong, blown off course by the disastrous Gulf of Mexico oil rig explosion and strategic failures such as the collapse of its Rosneft deal in Russia.

The once supremely-confident BP - in which pension funds used to invest £1 out of every £6 - seemed accident-prone and rudderless.

But maybe, just maybe, say analysts, the corner has been turned. Mr Dudley certainly gives the impression of man convinced that BP is on the mend.

What has prompted this optimism is the weekend announcement that BP had settled legal claims following the 2010 Deepwater Horizon rig explosion that killed 11 people and dumped crude along the Gulf of Mexico coastline.

BP is paying an estimated $7.8bn (£5bn) to individuals and businesses affected by a disaster that cost lives and livelihoods.

Many questions remain, not least that individual payments have not been assigned and so the final compensation figure could rise substantially.

And BP faces two other legal actions, from the US government and from five states affected by the environmental consequences of the disaster. Both cases will go to trial unless an out-of-court deal is reached.

Crucially, though, settlement of the class action is seen as making a resolution of the other two cases far more likely.

'Beyond the oil spill'

The class action suit was always the most important, said David Uhlmann, professor at University of Michigan Law School and a former official at the US Justice Department.

The remaining cases might cost BP another $20bn to $25bn, but would "begin the process of (BP) moving beyond the Gulf oil spill," he said. "The only trial I thought we would see in this case is the one that just went away."

Importantly, BP can perhaps begin thinking about a return to deepwater drilling in the Gulf, a region vital to the company's growth ambitions.

Analyst Fadel Gheit, of Oppenheimer & Co, believes the weekend settlement sends a signal that BP is telling US authorities that it is prepared to do whatever its takes - within reason - to put the affair behind it.

"They have been telling the government: 'We're just going to pay and get this over with. We want to be back in business,'" Mr Gheit told the Wall Street Journal.

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Don't expect investors to pat Dudley on the back”

End Quote Energy analyst

Mr Dudley knows that BP will now attract extra-special scrutiny wherever is explores for oil. The company's brand image is rock bottom.

Easy oil

Even before the Deepwater Horizon disaster, there was a deadly explosion at BP's refinery at Texas City, near Houston, and oil spillages in Alaska.

The increased focus on BP will be especially focused if, as expected, the company attempts to secure licenses for exploration and production in the Arctic.

The region holds vast resources and it seems inconceivable that BP will not bid for a slice of this - controversial - energy pie, especially as the discovery of "easy oil" dries up.

"BP should not stop dead in the water from progressing the very things that are at the heart of our industry," Mr Dudley said last month.

The company has introduced a major operational overhaul designed to improve the risks and safety of big projects. Mr Dudley described it as "probably been the biggest organisational change that BP has made in 20 years".

And last month BP has set out a strategy for drilling 12 exploration wells and a $22bn capital spending programme.

For investors, who have recently driven up BP's share price on hopes of a Deepwater settlement, it was a welcome re-focusing on strategy and the future.

The company's share price, now nudging 500p, is about 200p above the immediate post-crisis level and is expected to recover further on Monday as investors get their first chance to respond to Saturday's news.

Fanciful
Bob Dudley BP chief Bob Dudley has outlined a strategy he hopes will convince investors

"With the worst case scenario analysis looking increasingly unlikely, the discount in BP's share price can also begin to unwind," said Jason Kenney, analyst at Banco Santander.

In the wake of the disaster BP cut its dividend, tapped the markets for more money, and launched a $30bn-plus asset disposal programme to cover costs. At the time, some analysts put the final cost to BP at up to $200bn, a figure that now looks fanciful.

BP is not out of the water, but with the dividend restored, a strategy in place, and finances stabilising, the company is out of intensive care.

Criticism of management remains, though, and some investors want the restructuring to go further.

It has been suggested that BP should split the oil refining and marketing division from the exploration and production operations, adding perhaps $60bn-$80bn to the company's value.

One analyst said this weekend that as BP emerges from the shadow of Deepwater Horizon, investors will put pressure on the board to step up the pace of change.

"Don't expect investors to pat Dudley on the back when all this is over. Investors have had a rough ride and will want a return," he said.

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