My guess is that anyone who is a lawyer, or at least familiar with the legal process enough to understand that separate, discrete elements need to be met in order to win a lawsuit, looks to a nearby wall to contemplate head-pounding upon reading most political/social/legal commentary on the BP lawsuit resulting from its 2010 oil spill.
Why do I say that?
Because almost no commentary on the BP oil spill has discussed in depth the heart of the issue that Judge Carl Barbier of the U.S. District Court in New Orleans, LA addressed yesterday:
Did BP’s operators, employees, and/or management act with negligence—or gross negligence—regarding the jolt of methane gas that exploded on the Deepwater Horizon while drilling the Macando 252 well?
The answer to that question has a significant effect on the future for BP shareholders. According to the Clean Water Act, you have to pay $1,100 per barrel of oil that you spilled negligently. However, if you spilled the oil in a grossly negligent manner, then you may have to pay a maximum of $4,300 per barrel of oil spilled.
BP says that they spilled 2.45 million barrels of oil, and the United States government says 4.2 million barrels of oil got spilled into the Gulf (Source, Ruling Against BP Could Mean $18 Billion Fines). That’s why you see newspaper headlines blasting the $18 billion figure across the top of their websites—in a worst case scenario from BP’s vantage point, they could be found (1) grossly negligent, meaning they have to pay $4,300 per barrel rather than $1,100 which would cap BP’s exposure at $4.6 billion AND (2) they would have to pay the maximum $4,300 for 4.2 million barrels of oil if the judiciary agrees with the U.S. government experts completely.
We still have a long ways to go—it would not surprise me if it took until the 2020s for this case to be fully resolved—before we know what the total cost will be for BP. Because Jude Barbier was a district court judge, BP is now filing an appeal to get Judge Barbier’s gross negligence ruling overturned.
The difference between negligence, and gross negligence, is this: For BP to be found liable for negligence, the plaintiffs only have to show that BP owed a duty of care in its maintenance and handling of the Deepwater Horizon, breached it, and it caused damages. This wouldn’t be difficult to prove—and that’s why BP set aside $3.5 billion in cash provisions on its balance sheet to go towards paying off a finding of negligence.
But gross negligence—what quadruples the cost to BP—is a much higher bar because it suggests a higher state of moral blameworthiness. For BP to be liable for gross negligence, the plaintiffs against BP would have to show two things, first that:
(1) From the standpoint of the BP actors at the time of the accident’s occurrence, when viewed objectively, the conduct involved an extreme degree of risk, considering the probability and magnitude of the potential harm to others, AND
(2) The actors on BP’s behalf had actual, subjective awareness of the risks involved, but nevertheless proceeded with the conscious indifference to the rights, safety, and welfare of others.
To speak candidly, I was caught off guard that Judge Barbier concluded that BP acted with gross negligence. Look at that second element that needs to be met—you have to prove conscious indifference to the rights, safety, and welfare of others in your conduct. On the Deepwater Horizon, BP had (1) their contractors wear alarms to warn against any risks, (2) installed million-dollar monitors onboard to sense surges in methane gas, and (3) the company had detailed evacuation procedures which were put in place and were followed after sensing the odor alerting them of the gas surges.
This is the specific point at which I was wrong in my analysis: I thought the district court judge would look at the million-dollar monitoring equipment, sensory bracelets, and evacuation procedures that were put in place and conclude, “This may very well be a negligent explosion, but it is not a grossly negligent explosion because million-dollar sensory equipment, high-tech bracelet alerts, and detailed evacuation procedures do not offer proof that you are ‘consciously indifferent’ to the ‘rights, safety, and welfare of others.’”
The hard part for BP came in 2010-2012 when they had to sell off a little over $40 billion in assets, and this permanently reduced BP’s earnings power by a fifth. For a mental conceptualization of what had happened, the asset sales basically turned back the clock and reduced BP’s breadth and scope back to the size it was in 2005.
Going forward, in the worst-case legal scenario in which: (1) BP loses its appeal, (2) has to pay the maximum penalty of $4,300 per barrel of oil spilled, and (3) has to pay for the full amount suggested by the U.S. government, you’d be looking at another $18 billion or so in total costs. That would mean that BP would lose another ten percentage points or so off its pre-oil spill size, giving BP about two-thirds of the earnings power that it possessed in 2010.
The mitigating factors that would suggest good news for BP would be this: (1) BP had $27.5 billion in cash and cash equivalents on hand at the end of the second quarter in 2014, (2) the appeals court may rule that BP did not act consciously indifferent to the rights, safety, and welfare of others, reducing the potential scope of BP’s penalties down to $1,100, (3) BP may continue to be held grossly negligent, but the per barrel fine may be lower than the $4,300 maximum permitted, and/or (4) the judge may rule that the amount of oil spilled fell closer to BP’s 2.5 million barrel estimate rather than the government’s 4+ million barrel estimate.
This trajectory, however, does diminish BP’s ability to significantly grow the dividend in the coming years. The solace, though, is that investors reinvesting their shares will achieve a significant snap-back effect when you spend years reinvesting $0.585 quarterly dividends that are slowly growing into shares that are trading around $44-$45, such that you may have significantly turbo-charged your acquired wealth fifteen years from now when you look back at those high dividends reinvested at low prices when the price of the stock is significantly higher. Fifteen years from now, someone who reviews their reinvested dividends during the 2010s may regard the period as foundational in building wealth.
I know this isn’t a legal blog, and posts like these are boring to a lot of people (and no one wakes up in the morning wanting to hear the opinions of a law student), so I won’t make a habit of this, but I wanted to offer something different from the commentary out there from people like State Senator Brice Wiggins who said, “I think BP should accept the ruling and settle the damages so that we can move forward on restoring the Gulf Coast. Or Cynthia Sarthou, who said, “”BP’s oil is still washing up on the beaches of the Gulf and is still impacting the Gulf’s communities and wildlife. If BP will just own up to the damage they’ve done, then we can get to the business of restoring the Gulf. They should be making it right in the Gulf, not spending millions on PR and legal fees appealing this decision.”
This commentary about BP “taking responsibility for the damages” is obnoxious because it is entirely result-oriented; people look at the damage done, and form opinions on that. But gross negligence is supposed to be much more than that because it involves a certain mindset—it’s about consciously disregarding risks while possessing a state of mind of indifference rather than merely breaching duties owed to others—and the question of how to treat an organization that spends millions in safety equipment yet encounters a disastrous result is much more nuanced than the commentary currently prevalent on most mainstream publications would suggest (with the Financial Times being a notable exception).
Originally posted 2014-09-05 19:37:35.
Tim,
I appreciate your comments. Haven’t seen much written in the DGI community, but as an owner of BP stock, I am (of course) concerned with the judge’s ruling. Gross negligence seems to be a stretch, so I am holding onto my shares and continuing to reinvest dividends. I hope that you are right and in 15 years I look back at a brilliant non-move.
KeithX
10 years after the Exxon Valdez spill in Alaska the investing world had largely forgotten about the accident and Exxon was doing just fine. I imagine the same will be true of BP by the time the 10 year anniversary of the Gulf spill happens in 2020.
I am a lawyer with close to 4 decades of experience. I am also long BP and I believe it will survive this mess and ultimately thrive. However, I fear that if there is a modicum of truth to the quoted comments by Brice Wiggins and Cynthia Sarthou, BP has a long, winding and contentious road ahead of it. Also, if Judge Barbier feels the same way (and I suspect he does), BP should expect to be on the wrong side of many contested hearings.
Why? The disaster occurred on BP’s watched and right or wrong they need to take responsibility for it. The real world analysis is simple: “No drilling with expectation of profit by BP = No disaster with collateral damage.”
Lawyers are very good at arguing this or that for a fee. But experienced judges are even better at making rulings that withstand challenges on appeal. Hence, very low reversal rates.
IMHO, the law is very analytical in theory, but very subjective in practice.
BP should face the music and cut a deal now like Bank of America did with a lot less (some say, no) culpability.
I think we should be buying BP. This is a second chance to own a generous dividend payer. The lawsuits will pass and BP will thrive. I can see BP doubling 5 years out.
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