Oil major BP (BP.) is down 3.7% to 450.3p after second-quarter results came in way south of expectations. The FTSE 100 resources giant also reveals a $20 billion trust fund set up to meet claims associated with the 2010 Gulf of Mexico oil spill has nearly run dry.

As we discussed earlier this month, the £89 billion cap had already guided for a weaker performance than the first quarter when profits actually beat forecasts, coming in at $4.2 billion. Even in this context, the $2.7 billion posted is a long way below a consensus forecast for $3.4 billion and down 25% year-on-year.

The main culprits behind the poor numbers are lower oil prices, a higher tax rate and decreased Russian income. On the flip-side second quarter production is better than expected at 2.24 million barrels of oil equivalent per day (up 1% year-on-year against expectations for a 4% decline). Chief executive officer Bob Dudley says the group remains on track to deliver a material increase in operating cashflow next year.

These bright spots are overshadowed by the continuing pain felt from claims across the Atlantic. Total provisions against the massive oil spill (resulting from the Deepwater Horizon rig explosion more than three years ago) have reached $42.4 billion with a trial on civil charges due to resume in September.

In the interim, BP is fighting a legal battle over compensation payouts to private sector plaintiffs affected by the spill. It says the claims administrator Patrick Juneau is paying out 'fictituous' claims thanks to a misinterpretation of a settlement agreed last year. These claims have helped push the cumulative charge for items covered under the $20 billion fund to $19.7 billion – leaving very little headroom.

Any claims beyond those which can be met by the fund will come straight off the bottom line. In turn this could constrain BP's ability to increase its dividend, hitting shareholders directly in the pocket.

Analyst Dougie Youngson, from specialist investment bank VSA Capital, has a 'sell' recommendation on the stock and a price target of 400p. He is unsparing in his criticism: 'The company continues to buy back shares at the rate of five million shares a day. So far they have spent $2.4 billion of the promised $8 billion, which is the only thing propping up the shares at the moment and looks increasingly reckless as the US situation gets worse and worse.

'The market is expecting a big fine but maybe not the ultimate weapon of sanctions, imagine if BP were banned from owning or operating licences in the Gulf of Mexico or elsewhere?

'Until the court case is over the potential upside on asset value is a waste of time, only then will BP become of investment grade. Until then, investors should realise that the shares are only where they are because the company is buying them and other investments in the sector offer greater certainty of operating results, a vastly better management and a better ability to sleep at night.'

Investec analyst Neill Morton, who reiterates his advice to 'hold' the stock with a price target of 440p, is more forgiving, noting 'tentative signs of underlying operational improvement' but he still calls the three months to the end of June a 'messy quarter'.

Charles Stanley's Tony Shepard takes the long-term view and retains an 'accumulate' recommendation but does acknowledge that until the legal issues are resolved 'investors may prefer to invest in other oil & gas groups'.

Issue Date: 30 Jul 2013