While the Deepwater Horizon oil spill was undoubtedly a human tragedy and remains an environmental disaster, BP shareholders nevertheless have a need to assess the damage done to their investment.
What are the financial implications for the company, share price and dividends as a result of the Macondo blowout?
BP’s share price has been in almost daily retreat since April 20, when it closed at 655p, giving BP a market value of £123billion. As Energy goes to press, the group’s shares are trading at around 420p, a fall of more than a third.
However, this plunge needs to be placed within the broader market context, with the FTSE itself down by some 14.6% over the same period as EU sovereign debt concerns have resurfaced. Other things being equal, therefore, BP’s share price might have been expected to have slid by about 95p had it tracked the market in simplistic terms.
The remaining 82p fall can be attributed to Deepwater Horizon and equates to £15.4billion, or about $21billion. But is this justified?
To recap, BP is the operator of the Macondo prospect field, estimated to have held 50million barrels of oil prior to the blowout. It leased the rig from Transocean.
The US government has named BP as the responsible party in the incident and has insisted that the company will be held accountable for all clean-up costs resulting from the oil spill.
BP has accepted responsibility for the oil spill and the clean-up costs but, while not blaming Transocean directly, has pointed out that it was not responsible for the failure of the blowout preventer.
With the oil slick creeping towards the Louisiana coast, the potential costs of the clean-up have significantly increased to anywhere from $5billion to $16billion (and possibly higher). The ongoing daily cost for the offshore clean-up of about $10million per day is almost insignificant when set against the costs of onshore damage and potential litigation.
The market is clearly looking at the worst-possible-case scenario and, while there is a large element of upfront costs to the clean-up, it is the ongoing costs to BP of compensating affected communities that could last for several years and prove hugely expensive. Remember, there are still claims outstanding from the 1989 Exxon Valdez oil spill.
In an attempt to estimate the potential liability, the Alabama Gulf Coast region has tourism revenues in sport fishing and commercial fishing revenues of just over $1billion a year. Louisiana’s figures are about three times that figure.
These figures are revenues, not profits, so even if the activities were completely wiped out for two years, the cost would be much less than $4billion a year.
We would not be surprised if the total cost over a six to 10-year period were close to that amount. The worst-case scenario must be based on the slick ultimately causing significant damage onshore.
How safe is the dividend? BP has a very strong balance sheet and will be aware of its obligations to the millions of pensioners across the globe who depend on its generous dividend. The annual dividend of around 35.7p is not necessarily under immediate threat, but clearly, the situation could change very quickly if the leak cannot be stemmed.
Timing-wise, this could not have happened at a worst time for both the fishermen and BP. The former are about to enter their busiest season, while BP is now bearing the full brunt of anger from US politicians.
The costs of the clean-up and compensation can be met by the company and may have already been factored into the share price. Longer-term reputational damage may not be, however, and shareholders will also need to weigh up reduced prospects for the company in the Gulf of Mexico, as well as some uncertainty on the dividend.
Separately, better solutions to prevent another occurrence and, in the event of another disaster, more efficient clean-up operations will need to be found. I can only believe that this will be an opportunity for the oil service companies.
Mark McCue is a divisional director of broker and wealth manager Brewin Dolphin in Aberdeen.
Past performance of shares is not a guide to future performance. The opinions expressed in this article are not necessarily the views held throughout Brewin Dolphin Ltd. No director, representative or employee of Brewin Dolphin Ltd accepts liability for any direct or consequential loss arising from the use of this document or its contents
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