End of the beginning

BP: BP is suddenly enjoying a lot of good news in a very short time. That has helped the UK oil major’s shares snap back 40 per cent from their June low. The rally could have further to go.

The Gulf of Mexico disaster has wiped $56.7 billion from BP’s market value, adjusting for the fall in global stocks since its Macondo well blew out in April. Yet the group has taken a charge of “only” $32 billion for the disaster this year.

When the shares troughed, there were misplaced concerns about BP’s liquidity, financial resources and the appetite of the US government to make the company pay for the spill with its existence. The removal of those worries explains a large part of the share-price revival. With autumn elections looming, President Barack Obama now sounds like he wants to close off the affair, which has damaged his reputation too.

Much of the cost of the disaster is now quantifiable. BP probably won't see any of the $20 billion assigned to escrow for damages claims. The clean-up and containment costs were running at about $4 billion a month ago. These may go up another few billion dollars or so, but are unlikely to go much higher once the well is permanently capped. That leaves fines. These are calculated on a per-barrel basis, with the relevant figure being 4.1 million - the latest official spillage estimate less the amount BP captured. The best-case scenario would be a fine of $4.51 billion, or $1,100 per barrel. This rises to $17.6 billion if BP is found liable for gross negligence. The consequences of such a charge would be even worse than that. BP would not be able to bill its partners for their approximate one-third share of the overall cost, and years of litigation would ensue. Perhaps such a scenario would make the final bill approach the hit to BP’s market value.

Finally, there are continuing concerns about BP's access to new US drilling licences, given attempts by some senators to pass a law seemingly putting the UK group at a big disadvantage in drilling. Still, that faces big hurdles to hitting the statute book.

On the positive side of the ledger, the good newsflow is not over. BP says its board is much more "engaged". A big shake-up, involving a new chairman, would go a long way to restoring BP's still battered credibility. Other catalysts for the shares include further disposals of non-core assets at good prices, and strong performance of the existing business. Investors could yet see a bid, although that's not terribly likely.

Brave investors who saw BP wasn't mortally wounded by this a month ago have been rewarded. Even now, BP looks like it is at the end of the beginning of the recovery.