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BP Shares Plunge 13% on ‘Top-Kill’ Failure


June 1, 2010, 9:53 AM GMT?

By Steve Goldstein, London bureau chief for’s MarketWatch

BP’s failed attempt at pouring thousands of barrels of mud to plug the worst oil spill in U.S. waters sent shares of the London-listed oil giant down by 13% in early trade Tuesday.

Tuesday’s decline alone wipes £10.6 billion ($15.4 billion) off BP’s market capitalization, and the stock has lost over a third of its value since the Deepwater Horizon exploded on April 20. [Read BP’s latest response to the disaster here.]

BP begins new strategy

BP said Tuesday that it is working on deploying a so-called lower marine riser package containment system, but as with other attempts by BP, the system has never been attempted at 5,000 feet under water.

The one solution that seems likely to work — drilling relief wells — won’t be completed until August.

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BP CEO Tony Hayward

“This planned multi-step containment strategy is our best option for achieving this as we work hard towards completing the relief wells that will kill this well completely,” said CEO Tony Hayward in a statement.

The cost to date of the spill response, relief-well drilling, grants to Gulf states, claims paid and federal costs runs to $990 million, BP said. Analysts estimate billions more in damages and cleanup costs.

Given that rivals like Royal Dutch Shell and Total have dropped by roughly 11% to 15% over the same time frame, roughly $44 billion has been taken off BP’s valuation due to the spill.

Exxon comparison

The nearest cleanup comparison would be the Exxon Valdez, which is now the second worst in U.S. history. Fadel Gheit, an analyst at Oppenheimer Research, notes Exxon originally set aside $5.4 billion to cover legal settlements and paid $3.4 billion in cleanup costs. The Exxon legal settlement was eventually reduced to just $507.5 million with $500 million in interest payments.

Under the Oil Pollution Act passed since the Exxon spill, damages are capped at just $75 million. Even if Congress retroactively boosts that cap to $10 billion, as some analysts are speculating, BP would be on the hook for just $6.5 billion, because it owns 65% of the concession.

That cap on damages goes out the window, however, if BP is shown to be negligent. As for its ability to pay, the company generated $27.7 billion in cash from operating activities during 2009, and at the first-quarter’s conclusion, it had a debt-to-equity ratio of just 19%, a level that BP has previously said it would be willing to stretch to as high as 30%.

BP’s annual dividend costs $10.4 billion and it spends over $20 billion on capital spending. Its dividend yield is nearly 9%, by far the biggest for the oil majors — but that number is potentially misleading if BP scales back or eliminates its dividend.

The complicated calculus goes beyond even the damages and cleanup costs, however, because of President Obama’s newly announced moratorium on Gulf of Mexico drilling.

Lucas Herrmann, an analyst at Deutsche Bank, points out that Gulf of Mexico accounts for 14% of BP’s estimated 2010 production. A 1% rise in Gulf of Mexico royalties, a six-month drilling moratorium and a 20% increase in drilling and completion costs add up to a hit of $1.95 billion to BP’s bottom line for 2010, he says.

More worrisome for BP would be if the U.S. deepwater restrictions were to go beyond six months, and if other countries also were to make moves to curb deepwater activity. The European Commission already is examining this issue.

[Full MarketWatch column available here.]

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