The stockmarket cost to BP’s Gulf of Mexico oil leak has topped the $US100 billion mark for the companies directly involved, and other companies in the sector seeing tens of billions of dollars in market losses as well.
BP’s shares plunged in trading in Europe and the US this week.
Tuesday’s fall of more than 15% was the largest in 18 years.
By the close BP shares had lost 15% in New York trading and 13% in London.
Overnight Wednesday the losses stopped, but the shares didn’t recover ground.
Adding to the pressure was news the US Government has started a criminal investigation into the leak.
The probe will look at BP’s operations in the Gulf of Mexico, a move that could catch BHP Billiton which is a partner in some of the fields in the area.
The US government has said it will use all its laws to hold BP accountable, which has raised the stakes and has investors directly questioning the diminished oil giant’s future as an independent concern.
Its market capitalisation is now less than half that of Exxon Mobil and well under Shell (BP used to trade at a premium to Shell).
The share price is down more than 36% so far this year.
Either would normally get interested, but why would anyone want to buy a company that has so many problems unresolved, uncosted and unpaid for.
Since the accident happened April 20 (which resulted in 11 deaths and an oil leak of up to 19,000 barrels a day, not the original estimate of 5,000 barrels), BP shares have fallen nearly 40%, wiping out nearly $US70 billion in shareholder value.
Before the accident the company had a market capitalization of nearly $US183 billion. Now it’s $US115 billion.
Shares in other companies involved have tanked: Anardako (the other big shareholder in the well with a 25% stake, along with Mitsui of Japan), TransOcean, the driller, Halliburton, the services company and Cameron International, the blow out preventer manufacturer, have lost a collective $US40 billion in value since the disaster started on April 20.
Mitsui & Co Ltd shares fell more than 8% yesterday in Tokyo to a six-month low on worries about the financial cost of the well’s failure.
Mitsui owns 10% of the well and the latest slide in its shares came after the weekend failure of the efforts to plug the leak.
Mitsui’s shares have now lost over 20% of their market value, or nearly $US7 billion, since the spill occurred on April 20.
Tokyo media reports said brokers are estimating the trading house could be up for $US2 billion as its share of the costs of the disaster.
Investors are increasingly concerned the clean up costs, lawsuits, and added restrictions on drilling and production from the spill, now the worst in American history, will so badly damage BP’s earnings now and in the future, that its outlook as an independent company is now in question.
After the failure of the ‘top kill’ and ‘junk shots’ over the long weekend, BP is now trying to limit the amount of oil spewing into the Gulf by dropping a new containment cap to the top of the blow-out preventer, the collection of valves on the sea bed that failed to stop the release of gas and oil on April 20, which in turned produced the fatal explosion on the drilling rig.
Analysts in London and the US have produced a wide range of cost estimates – from $US4 billion to $US25 billion – for the financial impact on the oil giant.
BP now says the costs linked to the huge oil spill have now risen to about $US990 million.
"The cost of the response to date amounts to about $US990 million, including the cost of the spill response, containment, relief well drilling, grants to the Gulf states, claims paid and federal costs," BP said in a statement.
"It is too early to quantify other potential costs and liabilities associated with the incident."
The latest costs estimate rose $US60 million in three days from the $US930 million estimate given on Friday by the company.
BP still has immense financial strength: the group generated $US27.7 billion in cash from operating activities during 2009, and at the first-quarter’s conclusion, it had a debt-to-equity ratio of just 19%. The annual dividend costs $US10.4 billion and it spends over $US20 billion on capital spending.
But the cash flow will fall because of the shutting of production from the Gulf field where the spill is happening; cutting capital spending will not work because any cuts would be absorbed by the spending on the leak and the clean up. The dividend would have to be cut or in the end, dropped. That in turn would see the senior management and some board members walk the plank.
So don’t be surprised if BP is forced to put its US assets into some sort of administration to try and quarantine the damage from the rest of the company.
BP however needs the US: 40% of the company’s business comes from the US, particularly in the Gulf where it is the major producer, especially from the newer deepwater areas.
And if BP is somehow damaged and can’t continue, what does that mean for BHP Billiton?
BP is the producer on some of BHP’s biggest producing fields which are in the Gulf.
Restrictions and higher safety requirements could slash BHP’s production and profits from the Gulf fields.
