The US district court in New Orleans ruled this month it would impose a heavy fine on oil giant BP following its 2010 Deepwater Horizon disaster.
Under the Clean Water Act and the Oil Pollution Act (both 1990) BP could face massive costs, mainly to cover the clean-up following the catastrophic environmental impact of the disaster. Judge Carl Barbier ruled the company had acted with gross negligence and wilful misconduct but the company has said it will appeal.
Deepwater Horizon was termed ‘the well from hell’. Images of dead wildlife, an inferno at sea emitting billows of smoke, and accusations of bad management, botched explanations for the disaster to the press and the subsequent resignation of the man at the helm of the company hit BP hard. At one point, it became British Petroleum again – perhaps a mischievous move by its detractors.
One estimate is that the total cost of fines imposed on BP could amount to roughly $55bn (£33.8bn). BP is said to have already paid out or set aside roughly $43bn but could have to stump up another $18bn after Judge Barbier’s ruling. These are hefty sums, which any fund manager will have taken into account in terms of their positions in the company.
The Jupiter Absolute Return fund, managed by James Clunie, will over the longer term typically aim to have more long positions than short to benefit from the rewards expected from taking greater risk.
The fund’s latest data show that in terms of sector breakdown, oil and gas is 12.6 per cent net long in the fund. BP comes second in a list of the fund’s top-five long positions at 3.1 per cent of net assets, a touch more than Royal Dutch Shell.
“It is interesting that BP’s share price is the same as it was at the worst point in the crisis,” Mr Clunie says. “It is at panic levels, which is quite interesting because I have a general view that when a company has a shock as bad as Macondo, the firm rapidly reacts to it and tries to improve.
“I am surprised that the share price is at [these] panic levels given that the company in all likelihood has become better, leaner and sharper because of the shock it had.”
The reason for this is partly because of the stockmarkets that “do their own thing”, he adds. “It is an anomaly… given that companies that have had such a shock improve and work hard to improve. Generally, the share price should be at a higher level than the price seen at panic levels.”
Allianz Global Investors’ Chris Wheaton agrees that BP has come out of the crisis a better company. “It is a business that went through a cathartic experience for terrible reasons, but it has come out the other side a better business,” he says.
“It has taken complexity and a lot of risk out and I think it is very much now running itself – in spite of the Macondo risks and liabilities – as business as normal, compared with 2011 when it was still in regeneration mode. BP has got four key areas of development to deliver between now and 2017-18. It is still able to grow, albeit slowly, but then again oil is not a fast-growing industry.”
Matthew Beesley, head of global equities at Henderson Global Investors, has a different view. He says regardless of Macondo, BP certainly remains a dividend story. It is not expected the company’s dividend will be much affected by the aftermath of Macondo and the potential hefty fines forthcoming.
Henderson does not own BP stock. “This is not because we are worried about Macondo, but because we see other oil companies with better paths to growth than BP,” Mr Beesley explains.
“There are other oil companies with better growth prospects, which make a much more attractive total return story than BP, which is certainly a dividend story. I can see why owning BP for yield-centric investors at this point is the right thing to do.”
So what does a manager do in the face of a crisis?
“A crisis like [Macondo], that isn’t caused by a deterioration in trading [or] a fundamental weakness in its model, tends to be an opportunity,” Mr Wheaton says. “We as fund managers are not paid to panic, whereas the market is [usually] ready to panic for you.”
Back in July 2010 (when BP shares had fallen to just £3 a share) and on the basis of its own recommendation system, Allianz raised the company to its highest possible recommendation, which would have seen an investor make up to 60 per cent in 15 months, he notes.
Mr Beesley says he is clear about what a manager should consider when a crisis hits.
“The challenge and the caveat here is that we are always very careful to understand whether this is an institutional or a strategic, structural problem,” he says.
An understanding of risk and a having an edge over other managers in terms of what you know about a company is fundamental to the decision to trade, Mr Clunie says. “If you don’t, then why are you trading? I have been adding to BP and to oil companies that are talking the language of discipline and new project selection.”
Mr Wheaton also shares the view that BP’s dividend remains sustainable. “[BP’s] liability was adequately discounted or factored into the share price already,” he says.
“What the market is not understanding is that it is not the case that the [outstanding fines] left have to be paid by BP tomorrow. BP can still pay its dividend, as well as invest $25bn a year into the business and fund instalment payments of the fines.”
The ‘well from hell’ may have temporarily impacted BP. However, the general consensus appears to be that it has learned lessons from the Macondo spill and has emerged a leaner, sharper company. Its decision to appeal the US Court’s ruling could be a sign of renewed confidence within the company, though it looks like the markets remain slow to reflect the changes it has had to undergo.
