BP Adds $1.7 Billion To Cover Costs of Deepwater Horizon -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 17, 2018).

LONDON -- BP PLC's bill for the Deepwater Horizon disaster keeps getting bigger.

The British oil giant said Tuesday it would take a $1.7 billion charge to its fourth-quarter earnings because of settlement claims related to the 2010 Gulf of Mexico blowout. The explosion killed 11 people and unleashed the worst offshore oil spill in American history.

The charge adds to a disaster bill that BP last estimated at over $63 billion, a toll that continues to mount since the company's $20 billion settlement with the U.S. government in 2015. That agreement marked the biggest environmental-damages settlement in U.S. history, but it didn't deal with claims for economic losses related to the oil spill.

BP said a separate U.S. court-supervised settlement program -- which deals with such losses for Gulf residents and businesses, and is the source of the latest charge -- is nearing its close.

An overall profit for the fourth quarter is under threat because the company has already announced a $1.5 billion accounting charge related to the U.S. tax overhaul. BP will publish the quarter's results on Feb. 6.

The company was expected to report net income of $2.1 billion for the fourth quarter, according to a consensus of analyst estimates compiled by S&P Global Market Intelligence. That figure, now in jeopardy, represents what would be the company's strongest quarterly profit since 2015.

BP's share price fell 2.7% in London to close at GBP5.18. The stock still trades around 20% below its level before the accident and a severe slump in oil prices.

BP remains handicapped by its Gulf of Mexico liabilities even as the oil industry returns to profitability as crude prices recover from the slump dating back to 2014. Prices have risen to about $70 a barrel in recent days, giving energy investors and executives a sense of optimism for the first time in years.

The Gulf of Mexico bill imperils BP's progress in driving down its break-even oil price, said BMO Capital Markets, referring to the price level needed to cover capital spending and shareholder payouts with cash.

BP said in October it had pushed its break-even oil price below $50 a barrel, from $60 in February. Now, BMO sees BP's break-even price rising by $5 a barrel in 2018, though it also expects the company to manage and continue a share-buyback program announced in 2017.

BMO said Deepwater Horizon payments remain a concern. "There might be further provisions in the next few quarters, as the remaining claims might prove to exceed BP's expectations," the bank said.

BP is contending with the fallout from nearly 400,000 claims from Gulf Mexico residents and businesses for damages from the oil spill. A court-supervised program was established in 2012 to process the claims, the vast majority of which have been settled.

The exact value of the company's liability within the program remains unknown. In the fourth quarter, the court awarded a significantly higher amount per claimant than in the previous 12 months. That, combined with a ruling in May that included more cases in the process, forced BP to take the fourth-quarter charge.

The company said the charge is fully manageable within its financial framework and now that the claims process is nearly over it has a better idea of its remaining liabilities. In addition to flagging the fourth-quarter charge, the company raised its estimate of cash payments related to the disaster in 2018 to about $3 billion, up from its previous estimate of $2 billion.

The new Gulf of Mexico charge will be compounded by the recent changes to the American tax code. While the tax overhaul -- which reduces corporate income tax to 21% from 35% -- will likely benefit BP in the long term, the oil giant is among companies that have warned of sizable one-time accounting charges because the changes reduce the value of deferred tax assets.

Companies can log such assets during unprofitable periods and use them as credits toward future tax payments. Lowering the overall corporate tax rate makes those assets worth less on paper.

Corrections & Amplifications BP expects cash payments related to the Gulf of Mexico disaster to amount to $3 billion in 2018. An earlier version of this story said the amount was for the fourth quarter. (Jan. 16, 2018)

Write to Sarah Kent at sarah.kent@wsj.com

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January 17, 2018 02:47 ET (07:47 GMT)