Analysis: BP Loses $28 Billion in Market Cap

The sinking of the Deepwater Horizon and the resulting oil spill that has covered a large portion of the Gulf of Mexico is one of the worst industry tragedies in many years. BP, as the primary operator of the Mississippi Canyon 252 block, is largely responsible for the cleanup efforts that are underway. With a disaster of this magnitude, people around the world are talking about the implications and investors have shied away from BP's stock over the uncertainty caused by this event.

After the initial explosion and even after the sinking of the Deepwater Horizon, BP's stock price held up, dropping only $0.60 (less than 1%) between April 20th and April 23rd. However, as it became clear last week that the Macondo well was leaking a significant quantity of crude oil, the stock market's opinion turned. Just looking at the company's value loss since the incident, BP's stock was trading at $60.48 (Market Cap of $191 billion) on April 20th. By May 5th, it had dropped to $51.47 (Market Cap of $163 billion) for a loss of $28 billion in the company's overall valuation.

It's interesting to note that investor concerns over BP seemed to peak on Monday May 3rd when more shares of BP stock were traded in one day than had been traded during the entire month of February 2010.

BP Stock Price

With all things considered, a $28 billion decrease in the company's overall value seems like a significant overreaction on the side of investors. The recent uptick in the company's stock price seems to indicate that others in the market feel similarly.

The Exxon Valdez oil spill is the closest example we have to compare to the BP spill. About 20 years ago Exxon paid nearly $4.3 billion in clean-up costs, fines, and compensation. That number would translate to about $7 billion today.

Looking at BP's past, its 2005 Texas City refinery explosion killed 15 workers and injured 180. In 2007, OSHA fined BP a record $21 million, but 1,200 of the original 3,000 lawsuits filed against BP were still pending. Again in 2009 OSHA fined BP $87 million because BP had failed to comply with 270 case agreements related to the explosion, a decision that BP is appealing. In total, BP has stated that it has paid nearly over $1.6 billion in victim compensation to try to put that incident behind them.

Associations, businesses and individuals are already lining up to file lawsuits against BP and other companies involved in the oil spill, ranging from Gulf Coast property owners to fishermen to the families of the 11 workers that died on the rig. According to a report from Bloomberg, at least 31 class action lawsuits had been filed by May 1st. The legal fees and settlements from these many cases could mount into the billions, depending on how much oil reaches shore and how quickly the spill is cleaned up.

Even with all these potential liabilities and given the historical perspective provided by the Valdez spill and Texas City refinery explosion, the company is almost certainly not facing anything close to $28 billion in expenses. And even before the devaluation of its stock, BP was an attractive investment compared to its competitors, trading at a significantly lower multiple of cash flow and paying higher dividends than Exxon and Chevron.

At this time, the company is working hard and dedicating massive resources, along with the MMS, Coast Guard, Air Force and other organizations, towards fighting the spill. BP has worked to seal one leak in the pipe leading from the well. The Development Driller III spudded a relief well on Monday. BP, in conjunction with Wild Well Control, has begun efforts to place a coffer dam over one of the leaks and pipe leaking oil up to the Discoverer Enterprise drillship. In addition to efforts to stop the leaking well, hundreds of thousands of feet of boom have been put in place to protect shorelines. Tons of dispersants are being deployed to reduce the size of the slick. The company has also made $25 million block grants to Louisiana, Alabama, Mississippi, and Florida to support the response efforts on shore. With these and the other efforts underway, BP is striving to overcome this difficult situation.

It will be weeks before the full ramifications of the spill become clear, and it will take years after that to resolve the legal problems that are already arising from the incident. However, BP is making every effort to contain and offset one of the worst environmental disasters in recent history. There is no doubt that the company will come through this event.