BP share price falls, but are oil spill losses overhyped?

British pension funds are sitting on huge losses following a fall in BP’s share price of 13 per cent yesterday. The fall wiped £12bn off the value of the company’s market capitalisation: it is now worth £46bn less than on April 20, when the Deepwater Horizon oil rig exploded, causing the oil spill. The fall continued this morning, with BP shares down a further three per cent in early trading.

Legal & General, Barclays, Scottish Widows and AXA are among the pension funds with significant BP holdings – and possibly huge losses if there is no recovery in the share price, according to Bloomberg. The scale of BP’s importance to the UK economy becomes apparent when you realise that £1 in every £7 paid in dividends by FTSE-100 companies was paid by the oil giant. In 2009 it paid £5bn in tax to the UK exchequer.

Yesterday’s sell-off may have been down to investors reacting to the announcement by US Attorney General Eric Holder that he is investigating BP for any criminal or civil law breaches. "We will prosecute to the fullest extent of the law anyone who has violated the law," said Holder.

But many think the sell-off of BP shares is unjustified, because the fines and long-term public anger faced by the company are overestimated.

If BP is found guilty of gross negligence, the fine imposed for the
oil spill will be multiplied by four. A widely circulated analysis by
Canaccord Genuity claims that if the rate of the oil spill is found to
be 115,000 barrels of oil per day the oil giant could be liable for a
£40bn penalty if the spill is capped by mid-August – a reasonable
time-frame.

However, such estimates could be dismissed as scaremongering, since
the US Geological Survey estimates the real extent of the spill is a
much lower 12,000-19,000 barrels a day. This would translate to a
£6.7bn fine – and since it only owns 65 per cent of the breached
Macondo well, its real liability could be much lower.

Douglas Youngson, an oil analyst at Arbuthnot Securities, told CNN that, in the UK, 38 analysts have a buy rating on BP shares, while only three recommend selling it.

Youngson himself recommends selling – and sees BP at risk from a
takeover: "Given the collapse in the share price and the potential for it to fall further, we expect that it could become a takeover target -
particularly if its operating position in the US becomes untenable."

That seems a real possibility now. BP could be frozen out of future
Gulf of Mexico oil leases – a major problem for a company that makes a third of its profits in the US. ·