6/10/2010
By Conley Turner, Research Analyst

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The market value of British Petroleum (BP) shares has declined markedly in wake of the still unfolding oil spill disaster in the Gulf of Mexico.   The London based company now bears the dubious distinction of being responsible for the worst environmental disaster in U.S. history.  This title was previously held by Exxon (XOM) for its oil spill in Alaska some 20 year ago.  While Exxon's stock price was adversely impacted, the effect on the disaster was fleeting.  In stark contrast, the fall in BP's stock price has been extraordinary. The disparity in price action underscores the fact that the world is a much different place than it was 20 years ago.

Subsequent to the Exxon Valdez tanker running aground on March 24, 1989, in Prince William Sound Alaska, the XOM stock lost approximately 4.0% of its value in the first two weeks.  Within a month however, the stock price had rebounded, regaining the lost market capitalization.  At the end of the day, the impact on Exxon' stock price had not been that great and in retrospect was a de facto buying opportunity.

The Deepwater Horizon semi submersible rig was owned by Transocean Plc and contracted by BP when it exploded on April 20, killing 11 workers.  The rig eventually collapsed and sank into the Gulf of Mexico heralding the prolific spillage of oil into the ocean.  As the owner of the well and all of the oil contained therein, BP's share price was dealt a body blow. The stock has declined from around the $60 area at the time of the accident to hovering at about half that amount.  The decline translates into a loss to date of close to $100 billion in the oil Company's market value.   While tallying the final cost of the spill is a dynamic process, it remains an article of faith that it will exceed the $3.5 billion in clean-up costs and the $5 billion in legal and financial settlements paid by Exxon.

The difference in the reactions of the two stocks in what are seemingly similar incidents has to date been stark.   The Exxon Valdez disaster took place in the dark both figuratively and literally.   The Company was very reticent about providing updated information about the disaster to the public and media.  When it did actually start to respond in earnest to the spill, it was a situation of too little too late. In fact, Exxon's actions became the narrative of exactly what not to do in managing a crisis.
It is apparent that BP has embraced the lessons learned from the Exxon situation and is going about things very differently. 

The Company has embraced the idea of open corporate communications as it is constantly updating the public about the progress on stopping the spill.   The fact though, BP really does not have a choice in the matter.  The world right now is on the 24 hour news cycle.  The advent of media tools such as YouTube, Twitter, Facebook and blogs has made everyone with a mobile phone and a computer a news correspondent.  Back in 1989, this constant news cycle was a relatively new phenomenon and MTV was in its infancy when it reported on the Exxon Valdez oil spill.  While the images of oil covered seabirds were seared into the psyche of a generation, it was not on a sufficient enough scale to force Exxon's hand. That is no longer the case as the distribution of information is now very rapid. It is very difficult or even impossible for a company to hide much of anything particularly on this scale. 

The character of the market has also changed with headline risk having evolved into a sort of valuation metric.   The negative headlines about BP and the effect of the spill have been relentless and as such, investors, already on edge from recent economic and geopolitical events are opting to sell the stock en masse.  The scale and scope of the information flow is so much greater than it was back in 1989.  Had it been the case then, it is likely that Exxon's stock would have suffered a similar fate.

The constant negative news about the oil spill and the degree of uncertainty surrounding BP's overall survivability is weighing heavily on investor sentiment. The amount of oil that was spilled into Prince William Sound was known and totaled at approximately 10.8 million gallons. In the current BP case, the amount of oil spewing into the ocean is unclear. Estimates range from 5 million barrels per day to as much as 20 million barrels per day. Some estimates point to as much as 70 million gallons of oil to having already been spilled into the Gulf. The complete scope of the damage, and the consequences over the long term, is yet to be determined as is the extent of BP's liability in the matter.

As a matter of fact, unlike with what occurred with Exxon, there is now a raging debate as to whether or not BP will emerge from this crisis in the same configuration as when it began.  While from a financial point of view the company is still relatively strong, the incident has become politically charged and emotions are running high.  There are calls from various corners to have the Company suspend its dividend to having the government put the company under temporary receivership.  The air is sot rife with vitriol towards BP that it will likely take time before that kind of negative sentiment fades. While Exxon does bear the stigma of the Alaskan oil spill, it pales in comparison to what BP is facing and will likely have to endure for the foreseeable future.

At the end of the day, the reaction of the spill this time around revolves around the fact that the world is very different and market reaction is swifter and more severe.

Conley Turner
Wall Street Strategies