BP's Deepwater Horizon Tragedy: Processing the Slick
By Simon Hawkins, Managing Director, Omni Investment Research.
The first quarter analyst conference call by BP (LON:BP.) felt a little like visiting a sick relative in hospital – trying to process a mix of human emotion and the reality of a situation you really didn’t want to happen. It was a week after the explosion of the Deepwater Horizon and as Byron Grote, the company's CFO, came to the end of talking us through the numbers the call was opened up for questions. At that point we were all wondering if it really was 'ok' to ask about the things we were most worried about, like what exactly happened? How serious is the situation? How long until it gets better? And, the big one, despite being deeply concerned about the human tragedy we really did need some clarification on who's picking up the bill.
The questions were generally respectfully sombre and the answers confirmed and clarified that yes, BP is responsible for the cleanup and no, there was no third party insurance so the company is basically liable for everything. Inevitably, as questions got deeper, we got fewer answers as the company still had limited information. As I type, we are another couple of weeks into this, BP has had $30 billion wiped off its market value and there are still a lot of unanswered questions.
The growing slick threatening the Louisiana shores has become a metaphor for the dark shadow the incident has cast across the whole sector. We have a little more information about what caused the accident and, as companies appear before two US Senate panels, some initial finger pointing has started. But we still don't know just how bad this catastrophe is going to get and, critically, how BP is going to stop 5,000 b/d from further devastating the ecology and economy of a beautiful coastline, which I now feel lucky to have enjoyed on holiday just a few months ago. A number if things still don't add up and probably won't for some time. For me, the biggest question is this: if BP has all the right processes in place, how can a leading company in an industry that prides itself in the way it manages risk, fall down what today seems to be a bottomless chasm of exposure?
Zooming out, is it possible this kind of exposure exists right across the sector? What if it were to happen to a smaller company? What is the 'right' size of company to engage in deep-water drilling? Should we be linking such exposure to market capitalisation? What are the implications for investors?
The way BP responds to this tragedy will tell the world a lot about the corporate character of Western oil companies and this in turn will have an important influence on the global opportunities for the industry and investors. In many ways Tony Hayward is not just leading what used to be Europe's largest oil company but right now he is bearing a responsibility for the whole of the industry. As if containing oil gushing into the Gulf of Mexico and processing the slick wasn’t enough.
Let me know your views here or at goldenbarrels@omniir.co.uk
Simon is Managing Director of Omni Investment Research. Previously, Simon held senior positions at UBS and Dresdner Kleinwort, having been ranked number one by Thomson Extel for his coverage of the European Gas sector, number two in European Oils and three in European Utilities. With over 70% of the UK E&P sector now under coverage Omni Investment Research is the only independent research house that focuses exclusively on the global oil and gas sector.
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2 comments
I agree SW10 this is clearly one of Rumsfeld's "unknown unknowns". In any complex system, and drilling in deep water has to be one, there are going to be a bunch of unforseen events that can lead to catastrophy. One cannot plan for them all as by definition one cannot actually forsee them.
What is perhaps more important is how we respond to these events once they happen and IMV BP have done all they can to stop the leak and clean up the spill. They have also impressed me by playing it carte blanche and focussing on the immediate problems putting aside blame and liability for now.
I'm confident that the sell off in the stock was/is overdone however one must realise that of that $30Bn about half that was probably due to a general weakness in equities over the same period of time. That said I fully expect BP to be back at or above 600p by the end of the year.
For the sake of the environment as well as investors let's hope the fixes they are putting in place are as effective as we hope they will be.
Log
I think you're falling into the same traps as many other investors are on this one.
I believe we're dealing with an extraordinary sequence of events that has led to this situation - and a sequence that I don't think we'll see repeated from a ststistical point-of-view, let alone after the education we've all had.
So no, there's no exposure across the sector.
Well, BP are undoubtedly doing the right thing now and pursuing the clean-up in every way possible, paying whatever bills come their way. But I think we can be equally sure that they are keeping their receipts somewhere safe with a view to sending them to whichever service company takes the rap on this.
That's much more than they'll ultimately be liable for, IMV.
SW10