What Is Holding Back BP plc?

What Is Holding Back BP plc?

The recent ruling of U.S. District Judge Carl Barbier against BP plc on Gulf spill payments is keeping BP from resolving the settlement. But is the uncertainty around this settlement the only issue holding back shares of BP, or are there other causes?

Oil spill settlement isn't clear
BP has yet to resolve its $9.2 billion oil spill settlement, as its request to tighten accounting inspections on oil spill claims was rejected. The request was made to avoid fraud and faulty claims, and the ruling is likely to eventually bring BP back to the U.S. Circuit Court of Appeals. Even though the amount of the final settlement isn't clear, BP has allotted a total of $42.5 billion for the 2010 Gulf of Mexico oil spill, including cleaning, paying fines, and compensating businesses and residents for the damages.

If BP is forced to pay more than it had estimated, it could be funded through debt, slowing down its asset purchase program, selling additional assets, or by holding back future dividend payments.. In 2013 alone, BP paid more than $5.4 billion in dividends. So even if BP eventually needs to kick in more to the settlement fund, some of it could be backed by making any of the above-mentioned changes.

But most of the uncertainty related to this settlement is already priced into the stock. Moreover, it seems that BP's investors believe the worst is behind them, because BP's current valuation isn't far off other oil and gas producers such as Chevron and Royal Dutch Shell . BP's enterprise value-to-EBITDA ratio is around 5.7, while the ratios of Chevron and Royal Dutch Shell are 5.4 and 5.5, respectively. Conversely, BP still bears a higher risk as its debt burden is high, even for an oil company: BP's current debt-to-equity ratio is 1.36. In comparison, Chevron's ratio is 0.7 and Royal Dutch Shell's is 1. In recent years, however, BP has reduced its debt burden: Its debt-to-equity ratio dropped from 1.66 at the end of 2011 to 1.36 as of the end of 2013.

Besides the oil spill settlement, there are other factors that may have contributed to the fall in shares of BP, including the recent decline in the price of oil and the 4.7% drop in its revenue in the last quarter of 2013, year over year. One of the reasons for the decline in sales is BP's progress in the U.S. As an example, it was recently reported that BP lost $654 million in federal contracts (supplying fuel) during 2013. In comparison, back in fiscal year 2012, the company was awarded more than $2.5 billion. This shift has impacted the company's revenue in the U.S.

But BP isn't the only oil company to record lower sales in the fourth quarter of 2013. Chevron's revenue declined by 4%, while Royal Dutch Shell's net sales fell by 7.5%.

Bottom line
BP has started off the year on a negative note. The uncertainty over the oil spill settlement is definitely one of the issues holding back shares of BP. But it's not the only one. BP, much like its peers, has suffered from lower oil prices, and showed disappointing quarterly earnings report.

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Lior Cohen has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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