British Petroleum and the English World Cup team: Anything in common?

Ian de Lange of Seed Investments writes that two months ago BP plc was the fourth largest company in the world and one of the largest in the United Kingdom. It was the pride and joy of the British people and like their soccer team has now fallen out of favour.

With an explosion on an oil rig in the Gulf of Mexico on the 20 April, the worst environmental disaster of our lives has started. Since then more than 151 million litres of oil has been spilled into the ocean. But due to and lack of action form BP and a few PR screw ups their share price dropped like a stone. The share price dropped to $29 on the 9 June, when the BP came under the US Congressional enquiry. Last week BP CEO Tony Hayward was questioned by the US lawmakers on how this happened and the future plan of action. The chief of BP was very evasive during the questioning. BP is now being forced to cancel their dividend payouts and to set up $20bn fund for compensation claims.

The graph below shows the drop of BP plc share price over the last year.

The marine life in the Gulf of Mexico is not the only thing that has been affected. The already struggling UK pension fund industry was dealt another blow from this disaster. Last year BP paid £6.6bn out in dividends. The annual dividend payout is one of reasons why income hungry pension funds have a high exposure to BP. If you want to compare income from dividends to the other companies in the FTSE 100, for each £1 you received from BP you would have received £6 from the other FTSE 100 companies.

During the last 2 months BP lost $90bn in market capitalisation and with pension funds high exposure to BP, more than a billion pounds have been wiped off the value of the pension funds. The nest eggs of thousands of employees have been dealt another blow after the market crash of 2008.

The UK government is also affected. Last year BP paid £5bn in taxes and the year before that £10bn. In a period where a few European countries are already struggling with debt, the UK government will be forced to look at their spending and make sure that it is able to balance its books to avoid to be placed in similar position as Greece. The oil spill will also be affecting the tourism and fishing industry in the US

Until BP is able to plug the hole, hopefully mid-August, thousands of barrels of oil will be leaking into the ocean. In the mean time BP will have a long list of To Do’s. The will need to clean up over 160km of effected coastline. They will need to mend the relationships with their customers who are very vocal about this incident, compared to them. They must also be ready for possible takeovers, now that their share price has fallen so dramatically.  At least the CEO was able to take a bit of break over the weekend and was able to attend a yacht race this weekend.