Only last week, Morningstar equity analyst Catharina Milostan cut her fair value estimate for BP to 645p from 651p, having already raised her uncertainty rating and her total spill costs estimate, . However, concern on the longer-term business impacts of the Macondo well incident have caused Milostan to revisit her valuation model and this week slash her fair value estimate by almost a third. Below is her updated valuation; read the full analysis by clicking here.
We're reducing our fair value estimate for BP to 458p per share from 645p to reflect our growing concerns of longer-term business impacts of the Gulf of Mexico oil spill, including recovery costs and greater potential regulatory and legal liabilities, particularly after the government's launch of criminal and civil investigations.
We increased the rate at which we discount cash flows in our model assumptions to reflect greater uncertainty over the several years that it will take to finish cleanup and restoration in the Gulf of Mexico and to determine regulatory and legal penalties. Each day of unstopped oil flow requires BP to incur additional oil containment costs, shoreline protection and cleanup efforts, and potential settlements for businesses along the Gulf Coast. Civil penalties could reach $4,300 per barrel of oil spilled into the Gulf of Mexico. We estimate near-term oil containment costs could rise to $5 billion or more. Longer-term environmental cleanup and restitution for lost Gulf Coast business could grow to $10 billion or more. Potential civil penalties remain the most uncertain component and could take years to resolve.
We adjusted our model assumptions using a $20 billion midpoint for our estimated range for BP's 65% share of total potential costs and liabilities of $4 billion-$37 billion. Our base scenario also assumes a potential slowdown in US deep-water activity, curbing production growth in this region. We kept our assumptions for other BP oil and gas projects and downstream activity unchanged. In our discounted cash-flow model, our benchmark oil and gas prices are based on Nymex futures contracts for 2010-12. For oil, we use $76 per barrel in 2010, $79 in 2011, and $82 in 2012. For natural gas, we use $4.90 per thousand cubic feet in 2010, $5.50 in 2011, and $5.80 in 2012. We adjust our benchmark pricing to reflect the quality, location, and hedging of the firm's production.
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