Thursday, May 13, 2010

BP Stock Price Takes 20% Hit for Gulf of Mexico Oil Spill

One thing you've got to admire about free markets is their ability to put a price on anything. That's not to say the price in the market is always fair or true, but nonetheless it is a price.

Much attention is being paid to the Gulf of Mexico oil rig disaster, and the efforts to cap, plug, or catch the 210,000 gallons of crude oil gushing daily into the Gulf of Mexico. In the near term, that is going to be an environmental disaster on the Gulf coast, perhaps not as intense as the Exxon Valdez spill in 1989 but over a wider area of ocean and a more populated coastline.

The British oil company BP has been the focus of this attention in the media. But let's look at the stock market. Here's how Christine Tiscareno at Standard and Poor's summed it up in a research report on May 11, 2010:

"BP will be responsible for the clean-up costs of the U.S. Gulf of Mexico oil rig disaster. So far, based on publicly available information, it appears to us that BP can absorb the expense without damaging its finances or prospects. It also appears that the accident was caused by another company working on the well."

The stock market agrees. In April, before the spill, BP stock was trading at $60 per share, now it's trading at $48 per share. That's a 20% hit. Total lost stock value, around $40 billion. And Christine now rates BP stock a buy.

What about Transocean, the Swiss company that owns the drilling rig Deepwater Horizon, which burned and sank after an explosion that caused this disaster? Transocean trades on the NYSE under the symbol RIG. It was trading at $92/share in April and is now at $67/share, a 27% hit representing $8 billion in lost value. Stewart Glickman at Standard and Poor's rates RIG a hold:

"In May, RIG said it believed its indemnifications from BP were broad, and that BP consequently would cover environmental clean-up costs and associated third-party liability (such as to damaged fisheries). However, we think RIG still bears legal risk in terms of the crew members killed or injured, and in the event that RIG were deemed to be grossly negligent in its operation of the Deepwater Horizon."

Stewart also has a hold rating on Halliburton, the oil field services company involved in the accident. Its stock was trading at $35 in April and is now at $29, a 17% hit which represents $3 billion in lost stock value.

Out of pocket costs are less. BP says it has spent $450 million so far. The value of the oil spilled to date at today's prices (95,000 barrels at $74/barrel) is around $7,000,000, and continues to spill at $370,000 per day. A relatively little spilled oil can cause a lot of damage.

Testimony in Congress this week suggests that the blowout preventer which might have averted the accident had a dead battery, and that has raised questions about whether proper maintenance and safety procedures were being followed. I have only one question. When was the last time you checked the batteries in your smoke detector? Go do that now.

And how does the Deepwater Horizon spill compare to the 1989 Exxon Valdez oil spill in Alaska's Prince William Sound? That spill at 10.8 million gallons was the largest ever in U.S. waters. The Deepwater Horizon spill is at 4 million gallons total, and at the current rate will take another month to reach the Exxon Valdez total.

The big human tragedy is the 11 persons (9 rig crew and 2 engineers) missing after the explosion who are now presumed dead. We'll give the last word to Texas folk singer Nanci Griffith, singing here in 2006 a year after Hurricane Katrina hit the Gulf Coast:

"Gulf coast highway, he worked the rails
He worked the rice fields with their cold dark wells
He worked the oil rigs in the Gulf of Mexico
The only thing we've owned is this old house here by the road
And when he dies he says he'll catch some blackbird's wing
And we will fly away to heaven
Come some sweet blue bonnet spring"

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