AltUse Update - Gulf Oil Spill Threatens Shore


By James Herron of DOW JONES NEWSWIRES Read More 
 
LONDON (Dow Jones)--BP PLC (BP) said Friday it has begun preparing the coastlines of Louisiana, Mississippi, Alabama and Florida for the arrival of an oil slick as the escalating crisis in the Gulf of Mexico wiped billions of dollars off its market value.
Despite the severity of the incident, several analysts said the fall in BP's value far exceeds what will probably be the company's eventual liability for the disaster, making the current share price a good buying opportunity.
BP said it is mobilizing all resources at its disposal to prevent the oil leak turning into an environmental disaster. "We are doing absolutely everything in our power to eliminate the source of the leak and contain the environmental impact of the spill," said BP Group Chief Executive Tony Hayward.
"The company is today ramping up preparations for a major protection and cleaning effort on the shorelines," BP said in a statement. However, high winds and rough seas were hampering efforts Friday to send crews to lay out booms that will protect the coastline, said a BP spokesman.
Around 5,000 barrels of oil a day is leaking from BP's Macondo well in the Gulf of Mexico after the rig working on the well, Transocean Ltd.'s (RIG) Deepwater Horizon, was destroyed in an explosion last week. BP has been unable to stem the flow of oil and will most likely have to drill a relief well to halt the leak, a process that could take two to three months.
BP has already mobilized 32 ships and five aircraft to skim oil from the surface or spray dispersant chemicals at a cost of around $6 million a day. It is also preparing two relief wells at a cost of around $100 million each.
BP's liability for these costs, plus whatever costs are incurred by the U.S. Navy, which is also mobilizing to contain the spill after an order from President Barack Obama, has spooked investors. Since the initial explosion aboard the rig, almost GBP16 billion ($24 billion) has been wiped from BP's market capitalization.
This is way beyond the likely cost of the incident to BP, said Evolution Securities analyst Richard Griffith. The net cost to BP of the cleanup operation so far plus the drilling of two relief wells would be around $845 million, Griffith estimated. "Even if we add in $2.5 billion of punitive damages, similar to the sum for Exxon Valdez agreed in 2006, the numbers do not add up to the market capitalization drop," he said.
In the worst possible scenario for BP, which would include environmental damage to Louisiana fisheries and the Paradise Coast of Florida, BP could be liable for up to $8 billion in costs, estimated analysts from from Bernstein Research.
Overselling driven by fear is a common occurrence in the wake of high profile disasters, said Citigroup analyst Mark Fletcher. "In the six months after the Texas City accident in 2005, BP outperformed both the market and the sector, recovering by 19%. Even following the Valdez spillage in 1989, Exxon managed to outperform in the ensuing six months," Fletcher said.
The consequences of this spill may prove to be less severe than the Valdez disaster, which spilled 260,000 barrels of oil into Alaska's Prince William Sound, was for ExxonMobil Corp. (XOM), said NCB Stockbrokers analyst Peter Hutton.
The location of the current spill is far less remote, the industry has far greater resources at its disposal to combat the oil slick and BP's response has been robust, he said. "While it took Exxon executives six days to comment to the press, BP has been swift in its public reaction and immediately engaged with authorities in combined response," he said.
The oil spilled in the Gulf may also disperse naturally much more quickly than that from the Valdez disaster because it is lighter and the water is warmer, said Bernstein's report.