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BP shares drop; oil spill costs approach $1 billion

LONDON — Shares in BP PLC plummeted Tuesday, wiping billions off the British company's market value, after the failure of its latest attempt to stop the massive Gulf of Mexico oil spill.

Speculation about the London-based company's future mounted as the share rout — taking the stock to its lowest level in more than a year — was compounded by BP's revelation that its costs relating to the accident are approaching $1 billion.

Some analysts believe that BP's stock will rebound if renewed efforts to contain the spread of oil from the broken Deepwater Horizon well are successful, but others suggest that the company could become a takeover target.

"This situation has now gone far beyond concerns of BP's chief executive, Tony Hayward, being fired, or shareholder dividend payouts being cut — it's got the real smell of death," said Dougie Youngson, oil analyst at Arbuthnot.

"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 U.S. becomes untenable," he added.

BP shares closed down 13 percent at 429.9 pence ($6.31) on the London Stock Exchange on Tuesday — making it the biggest fall on the exchange on the first day of trading since the company's unsuccessful attempts at a "top kill" operation, shooting mud and other debris into the leaking well, over the weekend. The London bourse was closed Monday for a public holiday.

On the New York Stock Exchange, BP closed down $6.43, or almost 15 percent, at $36.52.

The move wiped $20.1 billion off BP's market capitalization. The stock has lost 40 percent of its value since the Deepwater Horizon drill rig exploded on April 20, and BP is worth $75 billion less on the open market.

The moves were equally stark on the bond side — the cost to insure five-year BP credit against default surged 78 percent, according to CMA Datavision.

One of BP's partners on the well, Anadarko, and Deepwater Horizon operator Transocean also slumped in New York action. Anadarko, which has a 25 percent stake in the well, tumbled 19 percent to close at $42.10. Transocean shares fell nearly 12 percent to $50.04, their lowest level since March 2009.

BP said the $990 million costs so far are related to spill containment, relief well drilling, grants to Gulf Coast states, claims already paid and federal costs.

The company said it has received 30,000 claims and made more than 15,000 payments, totaling $40 million, adding that it was too early to quantify other costs and liabilities.

Raymond James analyst Pavel Molchanov said that costs had spiraled dramatically higher from earlier estimates, leading the stockbroker to raise its cost assumptions substantially. It now assumes cash outlays net to BP of $5.2 billion in 2010, compared with its earlier estimate of $1.6 billion, and $2.3 billion in 2011.

Molchanov said much could hinge on BP's efforts to stem the spill, which has dumped between 18 million and 40 million gallons into the gulf, according to U.S. government estimates.

BP is now attempting to use remote-controlled submarines to cut pipes before placing a containment cap over the leak, a procedure known as a lower marine riser package, or LRMP.

"It's important to underline that halting the oil leak does not mark the end of BP's problems as a result of the oil spill," Molchanov said in a note.

"The specter of a web of litigation — both from the private sector and from governments — and the challenge of cleaning up the oil that has already been spilled should not be underestimated," he added. "However, if the LMRP ultimately proves successful, we believe it's likely that the shares of BP will see a near-term move higher."

Analysts at Killik & Co., stockbrokers in London, highlighted the wider potential implications of the spill on the U.S. oil industry and the oil price, noting that the U.S. government is looking to increase investment to develop domestic reserves.

"Following this spill, it may be more difficult to achieve this aim as environmental groups step up their opposition," they said in a note. "We believe any increased concerns over the supply-demand imbalance will place upward pressure on crude prices and plays well to our long-term theme of being overweight on the sector."

Information from MarketWatch was used in this report.

BP shares drop; oil spill costs approach $1 billion 06/01/10 [Last modified: Tuesday, June 1, 2010 10:21pm]

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