ⓒGetty Images; Itar-Tass

The Deepwater Horizon disaster damaged BP's image in the US; the falling price of oil forced it to cut back on production; and a settlement with the US gives its US operation a new lease of life

Five minutes before 2pm last Thursday, a call from the US to London told BP executives all they needed to know.

In a single stroke, a deal to end the legal battle over its role in the Deepwater Horizon disaster had been sealed, capping five years of turmoil that nearly brought the UK energy group to its knees. One figure says of the moment he learnt BP’s darkest episode was behind it: “I could see it in the eyes of the executive team. [The settlement] liberates us.”

The $18.7bn agreement with the US federal government, the states of Alabama, Florida, Louisiana, Mississippi and Texas, as well as 400 local authorities, will conclude nearly all of the litigation over America’s worst offshore oil spill. The disaster , caused when a well BP had drilled in the Gulf of Mexico blew out, killed 11 and spewed millions of barrels of crude into the ocean. Public fury erupted in the US, and BP was forced into a fire sale of assets.

All told, BP’s bill for the clean-up, environmental and economic damage and official penalties has reached $54bn. The question now is where the company goes from here. Is it really unshackled, able to return to a bold and opportunistic past? Or is this the cue for a predator, such as ExxonMobil , to pounce on a diminished rival?

The settlement is critical for BP’s prospects . In the words of one analyst, the headline number is “terrible”, but it brings closure . And the outcome could have been far worse.

Four months ago, Bob Dudley, chief executive, believed such a comprehensive deal was next to impossible. Claims from state and local governments had risen to more than $34bn. Found guilty of “gross negligence” by a US court in New Orleans, BP was waiting to learn the size of a penalty under the Clean Water Act, the maximum being $13.7bn. Past talks failed in 2012.

But circumstances had changed: Brent crude collapsed from highs of $115 a barrel last year to less than $60 by March. The plunge squeezed BP’s profits, making another multibillion-dollar penalty a frightening prospect. Inside the boardroom, there were fears that such a fine could even tip BP’s US exploration and production subsidiary ? one of its biggest businesses ? into insolvency. Executives were contemplating a scenario under which the company would pull out of most of its Gulf of Mexico business, which produces about 250,000 barrels of oil equivalent a day.

If the US subsidiary were to go under, the UK-based parent company could have been exposed to separate jury trials as the states and local governments sought further compensation.

But there would have been a cost to the US, too. Job losses would have been inevitable: BP employs 18,000 in the US and supports another 200,000 jobs.

“The financial stress on the US subsidiary and the spectre of us pulling out of those states completely was a strain for all the parties,” says one BP figure.

Adding to concerns for the states was the fact that any appeals process could last three to four years. And the oil price slide was hurting their budgets, too. Now both sides had an interest in a deal. At a meeting between Mr Dudley and Patrick Juneau, the Louisiana lawyer administering compensation for the spill, the decision was taken to try again.

Smoothing the burden

Brian Gilvary, BP’s chief financial officer, led a small team on an intense round of talks that began in May. By mid-June, the outlines of a deal had emerged that included a payment schedule, described by one executive as a “dividend stream for the Gulf”. Crucially for BP, this would smooth the total cost over 18 years.

There will be an immediate hit to BP’s profits, with a $10bn pre-tax provision coming in the second-quarter results. But the payment timetable ? and a $5.5bn Clean Water Act penalty rather than the $13.7bn ? means BP still has a future in the US. The company will pay a little over $1bn a year, a sum reduced by writing off a portion against taxes. The group would be immune from further federal, state or local prosecution relating to the disaster. Mr Gilvary says dividend payouts will be unaffected.

Shareholders have welcomed the deal. “This is manageable,” says Chris Wheaton at Allianz Global Investors.

Inside BP’s St James’s Square headquarters, executives will take time to recalibrate. No one predicts the company will try to return to the size it was five years ago. Mr Gilvary is not about to tear up a tightened capital spending plan that imposed cuts of 13 per cent for 2015. Pay has been frozen as part of the cutbacks. But, released from the uncertainty over Deepwater Horizon, the emphasis ? particularly in the US ? will start to shift, from being constantly on the defensive towards growth.

With Brent still below $60, the pressure on margins remains. But there will now be more flexibility when executives review a list of 50 projects yet to come online ? some 900,000 boe/d of production. All eyes will be on BP’s deepwater oil operations, including in the Gulf of Mexico, which have become its forte.

BP has eight rigs running in the Gulf of Mexico, making it one of the most active operators in the region. A big test of belief will be whether it decides to proceed with Mad Dog 2 , a large and complex deepwater project. “Had we not resolved this, we would be questioning whether we could put further investment in the US. There could have been an exit. Getting this resolved means we can now put the Gulf of Mexico back in the frame,” says Mr Gilvary.

Indeed, America is now also the scene of a new beginning. At Eldridge Place, in Houston, BP has reorganised the office space to make room for the headquarters of its “Lower 48 Onshore” business, which runs US upstream operations outside Alaska and the Gulf of Mexico.

Emulating smaller players

The idea behind the new HQ is to carve out a separate, autonomous business that can emulate the lean costs and dynamism of the smaller operators that have led the US shale revolution.

To that end, BP has cut about a third of the division’s staff and appointed David Lawler to run the business, recruiting him from SandRidge Energy, one of those smaller producers. Output, which averaged 232,000 boe/d in 2014, accounts for 12 per cent of BP’s wholly-owned production, and the company sees potential for growth. It has stepped up from just two rigs running at the end of last year to 11, including a coal-bed methane area in Colorado and the Anadarko formation in Oklahoma.

The group’s public image is on the mend, too. US political opposition to BP is far less intense now than it was at the height of the spill. Though some environmental groups complained that last week’s settlement was inadequate, others welcomed it, saying it would funnel over $12bn to the Gulf region.

Ed Markey, a Democratic senator from Massachusetts who was the scourge of BP five years ago while in the House of Representatives, said the deal would “go far in helping the communities of the Gulf Coast who are still working to recover”.

Piece by piece, BP’s relations with the US government have normalised. A ban on it winning federal contracts was imposed in 2012 by the US Environmental Protection Agency, costing the company a lucrative fuel supply deal with the US military. The ban was lifted last year after BP made commitments on ethics, safety and governance.

There is even talk that BP could start to build the business through acquisitions. Executives are said to be “scanning the horizon” and, should valuations fall, a US shale deal is a possibility.

That the group can contemplate this is due to its downsizing. After BP announced a $16.9bn loss in July 2010, it embarked on a sale of assets. It disposed of over half its pipelines, 35 per cent of its wells and 12 per cent of its reserves. Unprofitable refineries in the US and natural gasfields went, while BP scaled back in central and Southeast Asia, the North Sea and Russia.

Robin West of the Center for Strategic and International Studies says that, despite the scale of the disaster at its Macondo well in the Gulf, the cuts have left BP in a relatively healthy position.

“BP was forced to go through a process of disrupting itself and selling assets before its competitors launched similar programmes and before oil prices fell,” he says. “That meant it sold at excellent prices, at the top of the market.”

BP’s balance sheet remains strong. Net debt was $25.1bn at the end of March, slightly lower than the year before. Gearing, or the ratio of net debt to equity, is expected to rise from 18.4 per cent to just below 20 per cent, but stay below pre-2010 levels. Moody’s has changed its outlook on BP’s A2 credit rating from negative to positive.

Moreover, the settlement makes an all-paper bid, or cash and shares offer, for another group realistic. With the risk over Deepwater Horizon eliminated, a target company’s shareholders would be unlikely to balk at taking equity.

Acquisitions could even be a necessity. The group’s exploration record, like those of other majors, has been patchy. Its organic reserve replacement ratio, or oil and gas added to reserves relative to output, fell sharply last year. “The strategy has to be about finding some reserves,” says one investor.

Exxon factor

The risk is that Exxon may not give BP the breathing space it needs to execute such a strategy. There has been speculation that Exxon might turn its attentions to BP, having been deprived of the chance to buy BG Group by the ￡55bn agreed offer from Royal Dutch Shell .

This scenario has been well rehearsed by bankers. BP’s presence in the Gulf of Mexico and its deepwater assets in Brazil and Angola would be a draw. Its stake in Rosneft would add Russian output after Exxon’s own Arctic project was put on hold due to international sanctions. There would be savings.

But analysts are sceptical, pointing to BP’s shorter roster of “long-life” projects and relative lack of liquefied natural gas. Acquiring such a large stake in Rosneft ? BP holds a 19.75 per cent shareholding in the Russian company ? might not go down well in Washington.

There is also a profound contrast in cultures between Exxon’s methodical, process-driven style and BP’s more entrepreneurial approach. Rex Tillerson, Exxon’s chief executive, has been critical of BP’s safety performance, which would make a deal difficult both to negotiate and to execute.

It would be politically risky in the UK, too. David Cameron, prime minister, is opposed to an Exxon bid. Bruised by US drug group Pfizer’s bid for Anglo-Swedish AstraZeneca last year, when ministers promoted the deal only to find themselves on the wrong side of public opinion, Number 10 has let it be known that it wants BP to stay independent.

Do not rule an Exxon bid out, but Mr Tillerson has other options. At times during the past five years it has looked as though BP was on the brink of extinction. Today it is weakened, bruised and scarred ? but it is alive, and looks set to stay that way.