BP seen agreeing $20-25 billion oil spill settlement

By Tom Bergin

LONDON | Thu Jan 19, 2012 8:06am EST

(Reuters) - BP is likely to agree to pay the U.S. Department of Justice $20-$25 billion to settle all charges around the Gulf of Mexico oil spill, according to a leading analyst, a prediction that is at least twice what the company has set aside.

Martijn Rats, head of European oil research at Morgan Stanley, said he saw a 70-80 percent chance that the two sides would agree a deal on civil and criminal charges surrounding the 2010 disaster sometime between BP's full year results on February 7, and the scheduled start of legal hearings in New Orleans on February 27.

BP sources have told Reuters that talks are ongoing with the Department of Justice about a possible settlement and that the London-based company's board has shifted to weekly meetings to discuss progress.

Chief Executive Bob Dudley has said BP would like to settle, although not at any price. When asked about the matter by reporters on Wednesday, he declined to make any comment, saying it was a sensitive time to be discussing it.

When contacted by Reuters, BP had no comment to make over the likelihood or size of a settlement of the charges surrounding the blast on the Deepwater Horizon and subsequent spill.

BP senses the U.S. administration would like to settle the matter, not least because it is a U.S. presidential election year, the sources said but any outcome is still seen as uncertain.

The estimated level of settlement in the Morgan Stanley note - the most detailed analysis Reuters has seen on the potential cost of the spill - is much higher than other analysts have predicted, and around double the amount BP has taken a provision for.

Senior company sources last year told Reuters that the company was prepared for a massive payout. One source predicted BP would offer "the mother of all settlements".

Another said the settlement would likely be the second-largest in U.S. legal history, putting it between the $206 billion the tobacco industry agreed to pay U.S. states for treating smoking-related illnesses and the $7.2 billion banks agreed to pay to settle litigation related to Enron's collapse.

SHARES LAG

BP has the money to pay a $20-25 billion settlement - it is sitting on cash pile of more than $20 billion and has billions of dollars worth of assets on the block as part of its restructuring.

Nonetheless, Morgan Stanley predicts the larger-than- expected size of the payout will weigh on BP's shares. It rates the shares "underweight" and has a target price of 435 pence, against a Wednesday close of 481 pence.

The shares traded down 0.6 percent at 0905 GMT, against a flat STOXX Europe 600 Oil and Gas index.

BP investors are expecting the company to announce a dividend hike at its full year results, after Dudley said late last year that it had reached a turning point after the oil spill and was now returning to growth mode.

A big settlement would limit BP's ability to lift the shareholder payout.

Morgan Stanley believes the DoJ deal will cover all criminal and civil proceedings being pursued by the government against BP under the Clean Water Act, Alternative Fines Act, other laws and BP's obligation to make good any natural resources damages.

(Reporting by Tom Bergin; Editing by Hans-Juergen Peters and Mike Nesbit)