The Value Perspective

BP oil spill two years on - the market’s immediate reaction now looks excessive

Andrew Lyddon

6 Aug 2012

On 20 April 2010, an explosion on the Deepwater Horizon oil rig off the coast of Louisiana killed 11 people and saw almost five million barrels of oil spill into the Gulf of Mexico. As a result, BP, the oil well’s operator, was left with a multibillion-dollar damages and clean-up bill, lost a chief executive and became the biggest news story in the world, with some commentators suggesting it could go bust.

It has, unquestionably, been a very difficult time for everyone affected by the spill – including BP – and, two and a bit years on, the group has so far spent almost $9bn (£5.7bn) of cash from the trust it has set up to try to put things right. Obviously that is a huge amount of money – albeit a good deal less than the $17bn total provision BP has, as it were, baked into its accounts for what the trust might ultimately have to pay out. A significant number of the less complex claims – those brought by local businesses, for example – have already been settled by the trust. New lawsuits may, it goes without saying, be filed in the future but, as things stand it looks as if BP’s provision has been prudently set.

As mentioned, some market watchers went so far as to suggest the oil spill and its consequences would see BP go bust and perhaps it still could but, two years on, it is worth noting the group has resumed paying its dividend while what it calls its net debt ratio – the ratio of its net debt to its net assets – is 22% and indeed, thanks to some asset disposals, seems to have hovered around that level through the entire episode.

For more than two years, BP has been an easy story for the bears and indeed a great deal of money that could have gone to its shareholders has had to be directed elsewhere. However, the spill does not look to have put the group’s financial position permanently at risk while its share price, which initially fell from £6.51 to £3.06 in the space of two months, now stands above £4.25.

Furthermore, while the announcement of BP’s second-quarter results on 31 July has seen it back in the spotlight, how much have you really heard about the group and the oil spill in recent months? Two years ago this was, with good reason, the biggest story on the planet, but today there are any number of news stories that are considered to be of greater importance.

It was all too easy to paint a doom-laden scenario for BP in the summer of 2010 but, as we have said time and again, investors need to be very wary about getting caught up in the emotions of the moment and extrapolating the future from current events. In reality, the equity market, as it is prone to do, probably got a bit carried away with how bad things might be for BP and this created an opportunity for investors willing to think differently from the crowd.

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