BP moves to end long legal battle

Last week BP agreed to settle all government lawsuits surrounding the Deepwater Horizon disaster for a total of $18.7bn. Matthew Partridge looks at where the oil giant goes from here, and whether its worth buying.

It has been over five years since an explosion at the Deepwater Horizon oil rig killed 11 workers and pumped millions of barrels of crude oil into the Gulf of Mexico. Since then oil giant BP has had to face a prolonged legal battle, both in terms of private compensation claims and fines under various environmental laws. Last week BP agreed to settle all government (but not private) lawsuits for a total of $18.7bn, although the deal still needs formally to be approved by a judge.

This deal will "add at least $10bn to the $44bn that BP had already incurred in legal and clean-up costs", say Daniel Gilbert and Sarah Kent in The Wall Street Journal. However, it will also "avert years of litigation over the environmental impact of the spill". Meanwhile, "the payments would be stretched out over 18 years at around $1.1bn annually, softening the blow to the company's cash flow". A large part of the settlement is also likely to be tax-deductible, further softening the blow. So despite the scale, it's little wonder the company's share price rose by nearly 4% on the day in relief.

This is the largest such settlement ever agreed in America, but it still looks a "reasonable deal", agrees the Financial Times. However, an agreement "could and should have been reached as soon as the critical facts were clear", which was pretty much within a year of the original spill. BP was negligent, of course, but it was "heroic in its subsequent efforts to stop the leak, clean up the oil and compensate the victims".

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Instead, it seems that "the belligerence of the US authorities, and the state and local governments in particular", were the biggest hold-up focusing too heavily on "grandstanding and attempts to wring out the maximum possible payout". For example, claims for economic damage filed by state and local governments were reportedly more than $34bn, yet in the settlement they were resolved for just $5.9bn. It's a lesson the US should bear in mind for the next time there is a "large industrial disaster".

Our view

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri