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  • dr_2020 dr_2020 May 19, 2010 8:56 PM Flag

    Financial Times

    BP is oil-stained but may now be cheap

    By Andrew Hill

    Published: May 19 2010 21:16 | Last updated: May 19 2010 23:24

    The Gulf of Mexico oil spill is bad – the original explosion cost lives and the aftermath threatens livelihoods – but watch the BP share price rather than the progress of the slick and you would assume that it was far worse than it is.

    As Bank of America Merrill Lynch pointed out on Wednesday, the 20 per cent drop in the UK oil company’s market capitalisation since news of the Gulf of Mexico oil spill broke last month implies a gross cost of the disaster, adjusted for market and foreign exchange movements, of $28bn.

    So far BP has spent $625m on its response – including $170m in grants to the affected states – and has wisely said it won’t insist on the $75m liability cap on other damages from potential oil spills. Yet even assuming liabilities of $10bn (the new limit proposed by some senators) and a $3.5bn cash cost of the clean-up, the market is overstating the damage to BP.

    Look at it another way, as Standard & Poor’s equity research has, and the fall in market capitalisation since the incident – down £24bn as of Wednesday – is far greater than the £14bn on-balance-sheet value of BP’s intangible assets and goodwill. A collapse of that magnitude would represent a huge hit to the company’s reputation. Yet, as UBS has pointed out, by moving quickly, and repeating regularly that it will meet all legitimate claims, BP has minimised the accusation it is dragging its feet – a perception that hurt Exxon after the Exxon Valdez spill.

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