Oil Shock
The last few months have been rather traumatic for the stock market. In the UK we have had to contend with the General Election and the reality of a hung parliament resulting in a coalition government – something of an unknown quantity here. We have also seen the “Greek tragedy” unfold in the EU, which has led to fears of contagion and the realisation of just how intertwined the fortunes of the European countries are. As if this was not enough, BP one of the largest companies in the UK, has had to contend with an environmental disaster: the explosion of an oil rig in the Gulf of Mexico and the subsequent prolonged battle to stem the flow of oil has dominated headlines for several weeks.
In mid-April the share price of BP stood at over 650p, since then it has plunged by more than a third to around 430p at the time of writing. As pictures of the disaster dominate the news and rhetoric from the US government is particularly vociferous, it is worth remembering that mid-term elections have done much to encourage this sabre rattling, with the President wading in to try and curry favour at home, as he faces waning popularity. BP is being portrayed as incompetent at best and criminally negligent at worst. In terms of public relations there are clearly a great many lessons to be learnt: a company with 60% of its operations in the US should be able to avoid high profile misjudgements in terms of statements made.
The whole situation has of course given rise to wider implications: President Barack Obama has extended the moratorium on exploratory deepwater drilling in the Gulf of Mexico to six months and drilling off the coasts of Virginia and Alaska will also be suspended. This will result in other oil explorers being adversely affected, such as Royal Dutch Shell. Prolonged project delays in the US could also have serious implications for asset-heavy service companies which depend on high utilisation rates and which are therefore vulnerable to a slowdown in deepwater drilling.
The more specific implications are for BP itself. It appears that the latest attempt to cap the oil pouring out into the sea may have been more successful, at least in part, but once this has been stemmed attention will inevitably turn to the cost of this whole event. Although there may be some scope for sharing the costs with, for example the rig operator, the media spotlight is firmly on BP. There have been calls for the dividend to be suspended, which is weighing heavily with the market and the company faces a difficult balancing act in keeping shareholders sweet on one side against political pressure on the other. In fact BP is a substantial cash generator which could in theory absorb the estimated costs of the disaster (ranging up to $37bn) as well as maintaining the dividend, but this would clearly not be met with universal approval. There has even been speculation over BP’s future in the US and further, as in independent entity. We can only watch and wait for a little more clarity.
This does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise. Investments carry risk and investors may not receive back the amount invested. The views expressed are those of the author and not necessarily of SWIM.
Disclaimer
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
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