Warning on BP Shares -- 'Mess Is Not Over'

NEW YORK ( TheStreet) -- A bit of euphoria hit the headlines over the weekend after BP ( BP) announced on Friday that it had settled with a plaintiffs group for $7.8 billion, removing one major legal overhang produced by the Macondo oil spill. Analysts were out saying that BP deserved at least a 5% share spike, if not a 25% bump back to where it had traded before the Macondo well blew -- $60 -- and the Deepwater Horizon rig exploded on April 20, 2010.

BP shares rose between 1% and 2% in early trading on Monday and that's about right.

The time for the euphoria trade in BP was back during the spring of 2010, when BP shares were trading at $28 and experts doomed it to bankruptcy. That fear should have led to the euphoric feeling that scooping up BP shares was a no-brainer because finally the oil giant would get its act together and cap the runaway well.

Now, though, with BP shares trading right around the 52-week high just below that $50 mark that has served as a ceiling for shares, there's no reason to suspect that shares head straight back to the $60 mark, where they were trading before the spill. It's a little late to the party.

If there is upside in BP shares to the $60 mark -- or the 25% that some analysts called for over the weekend -- it's not going to happen in one euphoric shot.

BP still has plenty of problems.

The most obvious issue is the Justice Department, the biggest legal overhang of all, which shouldn't even need to be explained at this point. If you aren't already aware of the potential Clean Water Act fines that could run at least as high as $17 billion if BP is found grossly negligent or the potential criminal charges that the Justice Department could pursue, BP isn't the right stock for you, and that's just the beginning of the company's issues.

BP is still a company that had to cut into production to raise oil spill funds.

And then BP lost the Rosneft deal to ExxonMobil ( XOM), a deal that would have helped to convince investors that the company has a clear path to growth.

BP has the same problem as the rest of big oil peers in the most general sense: growing production over the next decade, and it's even more magnified than others due to the spill-related asset sales.

BP experienced a year-over-year decline in upstream -- exploration and production -- profitability in 2011. Upstream profit totaled $7.6 billion in the fourth quarter, slightly lower on a sequential basis, and a 5% decline from the year-ago equivalent period. For the full year, upstream profit of $30.5 billion was slightly lower than the 2010 profit level. Keep in mind that's during a period of time when crude oil prices were spiking and leading to record profit levels among BP peers.

Royal Dutch Shell saw profits go up 48% year over year in the upstream (all the other majors saw big year over year growth too). No matter how optimistic a line BP takes, Macondo still has impacted underlying results, both through decreases in Gulf of Mexico production (a bigger deal for BP than any other major) and from having to sell off other production assets.

BP has restored its dividend, but to half the former rate, and many investors were in BP pre-spill specifically because the dividend was twice the level of peers.

BP probably deserves to be back where it was before spill at some point, but it still has to prove that in production growth and results in the Gulf of Mexico where it is the most prominent explorer.

The potential is there, but this settlement isn't the single trading event to catapult BP to $60.

"I see the settlement as a small, incremental positive. This mess is not over. We don't know what the final bill will be. I agree with the idea that the market reaction seen in Europe looks about right," Argus Research analyst Phil Weiss said.

The U.S. market reaction is about right, too: a polite bump but no huge tear by BP shares.

If Robert Dudley, BP CEO, has done a lot right since taking over for Tony Hayward and trying to put the oil spill behind the company, he still has to prove that BP is moving forward as opposed to just cleaning up the past, and predicated on what oil investors care about most: growth in production and profitability per barrel of oil.

-- Written by Eric Rosenbaum from New York.


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