British Petroleum’s stock market cap has slipped $49.9 billion or $16.10 per share – 27% – since the rig drilling the company’s well in the Gulf of Mexico exploded on April 20, then burned and sank.
Over the same period, the S&P 500 Index lost 11.2%, about a third of BP’s loss. More importantly, BP’s peer group of integrated international oils fell just 15.1%; so, BP’s downturn was nearly twice as steep relatively as the other big oils, and nearly three times the stock market’s slide.
British Petroleum Stock Loses Are Twice That of Its Peer Group
The differential in the company’s decrease, far in excess of its peer group, can be considered the results of a prediction market, playing out inside the stock market. It is estimating the ultimate decline in BP’s stockholder equity, as a result of financial losses from the blowout.
At this stage, the prediction market is very immature, because so many unknowns confound the issue. Presently, the blame game is underway, with every participant in the accident trying to shift blame and financial restitution to others.
Prediction Market Is at Work Evaluating BP’s Potential Liability
However, a prediction market – the wisdom of the betting crowd - becomes more accurate as the wagered event (BP payout) draws nearer.
British Petroleum’s blown-out well continues to spew 3,000 to 5,000 barrels of oil and gas condensates into the ocean each day. The oil slick and tar balls then float to land and contaminate shorelines. Besides company efforts, a flotilla of 70 service vessels, manned by federal, state and industry personnel, are struggling to bring the disaster under control. BP is spending $6 million a day on the emergency.
The mishap threatens to become an environmental and economic calamity for the entire Gulf of Mexico, and possibly some of the Atlantic coast. Eleven workers died in the holocaust, which occurred 45 miles south of the Louisiana coast.
Transocean Ltd. Was Owner and Operator of Drilling Rig
The $350-million drilling rig, “Deepwater Horizon,” was owned and operated by Transocean Ltd., and was under contract to British Petroleum, the oil and gas lease operator. A wellhead blow-out preventer malfunctioned. It could not hold the pressure in the 18,000-foot well, and is a one of several prime suspects in assessing blame.
So far, in establishing responsibility for the disaster, there has been a great deal of finger pointing. Principally, three parties were in the daily operations network. Besides British Petroleum and Transocean, a crew from Halliburton oilfield services was aboard the football-size rig, to provide well completion services.
Halliburton cemented the well. It is possible that was not done improperly, which could have caused the blowout. Also, Houston-based Cameron Iron Works, manufacturer of the blowout preventer, could become culpable.
Secretary Salazar Reorganizes Interior Department’s Minerals Management Service
In addition, the federal Minerals Management Service (MMS) apparently shares responsibility. That arm of the Interior Department exempted lease operators in the section of the Gulf of Mexico in question from having to file blowout emergency procedures. Interior Secretary, Ken Salazar, has reorganized his department, as a result.
Some stockholders of BP are getting socked twice by the misadventure. Stockholders who reside in the affected areas, of course, share directly in the potential degradation of the ecology in the Gulf of Mexico; while all investors suffer the losses in BP’s stock value, as the market reacts to potential huge future expenses for well control, cleanup and litigation.
That does not include write-offs in oil and gas reserves from the leaking hydrocarbon pool, which will decrease book value even further, when calculable.
Prediction Market Suggests Accident Could Cost BP $25 Billion
As mentioned, since the explosion on April 20, the BP Plc stock market cap has fallen from $187.3 billion to $137.6 billion - $49.9 billion, or 27 percent. That is $16.10 per share. In contrast, the average decline in BP’s peer group of Royal Dutch Shell, China Petroleum Ltd., Exxon-Mobil and Chevron is 15.1%.
Keeping the math simple presently, this suggests the market has assigned about half or $8.05 ($16.10/2) of BP’s share loss to expectations of its total reduction in value from the blowout. As the workout evolves, these expectations will likely fluctuate, and become more meaningful.
The $8.05 per share additional risk assigned BP common stock suggests the present value of future remedial expenditures is $25.0 billion ($8.05 x 3.1 billion shares outstanding). The stock market has become a prediction market, estimating the cost for the company will be $25.0 billion.
Other Recent BP Miscues Are Also Weighing on Investors’ Minds
British Petroleum’s safety record is also weighing heavily on the minds of investors. Since 2005, the company has experienced several major accidents at its facilities, one of which included 15 fatalities. In a letter dated to ProPublica.com dated January 14, 2010, Representatives Henry Waxman (D-Calif.) and Bart Stupak (D-Mich.) pointed out recent accidents.
BP shares will fluctuate, probably markedly, as this prediction market within the stock market arrives at a consensus BP liability, over time. Presently, investors should assume the stock is a speculation, even though it has been an investment stock historically.
*The writer is a Chartered Financial Analyst (CFA).
Howard Bryan Bonham - Howard Bryan Bonham is a former daily newspaper editor and award-winning financial writer.
