Billions of pounds were wiped off the value of pension funds yesterday as shares in BP slumped dramatically because of the Gulf of Mexico oil spill.
One of Britain’s biggest companies and a key indicator of its economy, the oil giant suffered its worst one-day share fall for 18 years.
At its lowest point, the company’s share price was nearly 17 per cent down, although it recovered slightly by the close of trading. Even so, £12billion had been wiped off its market value.
Last night experts were warning that the company had “the smell of death about it” as fears grew that the disastrous leak off the Louisiana coast could continue for another two months after the latest attempt to stem it failed.
Market experts warned that the extraordinary decline of the City heavyweight – a key stock for many UK pension fund investments – would inevitably leave British pensioners poorer.
Pensions expert Alan Smith, chief executive of financial planning firm Capital Asset Management, said: “This is a disaster for BP and most pension funds will undoubtedly have exposure to BP and will be affected. If BP were to halve in value this could lead to pension values going down one or two per cent.
“Pretty much every pension fund in the country owns a bit of BP and it has now fallen some £45billion in value.” Mr Smith added that with the markets expected to struggle, pension funds were likely to sink even further.
“In times like these, with the continuing European debt crisis, there is a lot of nervousness on the markets,” he added. The share collapse means a £15,000-a-year pension will be cut by about £300 to £400 a year, with possibly worse to come.
The BBC’s business editor Robert Peston said: “Given that BP is a core holding of most British pension funds, that’s tens of billions of pounds off the wealth of millions of British people saving for a pension.
“With BP dividends representing about 8 per cent of all income going into those pension funds, and a considerably higher proportion of all corporate dividends received by those funds, if BP’s oil spill causes collateral damage to its dividend-paying capacity, many of us will be feeling a bit poorer.”
Other experts warned that BP could collapse altogether, a fear that sent shock waves through world markets.
Dougie Youngson, oil analyst at banking group Arbuthnot, said: “This situation has gone far beyond concerns of BP’s chief executive Tony Hayward being fired, or shareholder dividend payouts being cut. It’s got the smell of death. This could break BP.”
He added: “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.”
BP’s dramatic shares slump sparked a wider plunge on the FTSE 100 Index of leading shares, which dropped more than 2 per cent before recovering slightly. BP accounts for about 7 per cent of the FTSE 100, meaning each 10p change in its price moves the index by nearly 9 points.
BP’s share price lost around 80p at one stage, taking it to its lowest level since last March. Attempts to cap the leaking well with mud and debris were unsuccessful at the weekend and the company is using remote-controlled submarines to carry equipment and cut small pipes 5,000ft below the surface before placing a containment cap over the leak.
The attempt, which began on Sunday, should take four days to complete. But BP’s chief operating officer, Doug Suttles, warned: “We’re confident the job will work but obviously we can’t guarantee success.”
The spill has dumped between 18 and 40 million gallons of oil into the sea since the Deepwater Horizon rig exploded and sank on April 20, killing 11 of its crew.
Ian Cowie of the Telegraph writes, BP-bashing Americans could jeopardise British pensions. They should remember 1988:
The next time Barack Obama places heavy emphasis on the first word in British Petroleum or another American politician boasts about having his “boot on the neck of British Petroleum” just remember it’s your pension that’s taking a kicking.
This is not just a problem for City fat cats or a big bad oil company everyone loves to hate. BP paid £6.6bn in dividends last year – equal to £1 in every £7 paid out by all the companies in the FTSE 100 – and remains a major holding in most income-hungry pension funds.
That seemed a reasonable strategy while returns on cash deposits were negligible but BP’s share price has now plunged by 33 per cent since the disaster in the Gulf of Mexico. It stood at 646p in April but traded around 433p today.
Independent statisticians Bloomberg list household name fund managers including BlackRock, Legal & General, Barclays, M&G, Scottish Widows, Threadneedle and AXA among major shareholders in BP. Some may have bought since the share price began to slide but most are sitting on massive losses.
You could even argue that BP’s survival – and the beleaguered giant is now being talked of as a takeover target – is vital to the British Government’s plans to cut budget deficits and balance its books. BP paid £5bn tax in 2009 and £10bn tax the year before when oil prices were higher.
At the most microscopic end of this macro economic disaster, I had better declare an interest here; like hundreds of thousands of small investors, I hold BP shares and hope to continue doing so.
Nobody should belittle the scale of the disaster in the Gulf of Mexico. 11 workers died when the Deepwater Horizon rig exploded, incalculable environmental damage has been done to more than 70 miles of Louisiana’s coastline and tens of thousands of people’s livelihoods have been threatened.
No wonder nearly 250,000 people appear to have joined a Facebook group called “Boycott BP” and American politicians including Interior Secretary Ken Salazar seem to be competing to see who can vilify the oil giant in the most lurid language.
Now the latest bad news from America is that CBS News and the Washington Post are reporting that the government may be preparing to prosecute BP, alleging criminal negligence. BP denies it took any safety shortcuts – despite the shameful history of its Texas City refinery explosion in which 15 workers died – and insists it is doing everything possible to put things right in the Gulf of Mexico.
But the American government and media seem to have decided the oil company put profits above safety in its list of priorities. Nor is there any reason to suppose British politicians and journalists would behave any differently if it was an American company that suffered similar setbacks here.
Or is there? When the Piper Alpha rig exploded in the North Sea in July, 1988, no fewer than 167 workers died and environmental damage pushed insured losses to £1.7bn. It was the worst offshore oil disaster in the world at that time and feelings ran high in Aberdeen, where many families suffered bereavement and financial loss.
But I do not recall Margaret Thatcher seeking to make political capital out of that tragedy by using inflammatory language about having her boot on the throat of Occidental Petroleum, the American oil giant which operated Piper Alpha. Oxy, as it was known because of the Los Angeles-based company’s New York Stock Exchange ticker, did not become the target of any government-sponsored hate campaigns in Britain.
By coincidence, I happened to be in Aberdeen at the time of the Piper Alpha tragedy and remember an uncle who worked on the rigs pointing out that drilling for oil deep below the sea is a dangerous business. Perhaps intelligent American politicians and journalists ought to remember that fact.
Finally, Robert Preston of the BBC asks, Will BP be forced out of the US?:
There's another £13bn off BP's market value today, taking the cumulative loss since the company sprung its hideous leak to well over £40bn.
Given that BP is a core holding of most British pension funds, that's tens of billions of pounds off the wealth of millions of British people saving for a pension.
And with BP dividends representing around 8% of all income going into those pension funds (and a considerably higher proportion of all corporate dividends received by those funds), if BP's oil spill in the Gulf of Mexico causes collateral damage to its dividend-paying capacity, well, many of us will be feeling a bit poorer.
As I've written here before, it's certainly not ludicrous to assume that the final cost for BP of this mess could wipe out at least an entire year's profit (which for the past three years was just over £13bn on average) - once compensation and possible fines have been paid.
Perhaps more damagingly, the debacle is doing considerable harm to the value of its brand in the US - with what looks like every US citizen, from President Obama down, equating BP with the sullying of one of America's most cherished coastlines.
The talk among BP oil executives is that the company's reputation in the US may have been so tarnished that the board will conclude that an orderly withdrawal from America - with the sale of its massive US assets - may be necessary (it's widely thought, for example, that Chevron would be an enthusiastic buyer of those assets).
Were that exit to occur, it would represent one of the great corporate humiliations of all time, a reversal of those mega-bids of Amoco and Arco by BP - when under the sway of Lord Browne - which transformed a division-two British player into one of the global giants only a decade or so ago.
And what of Lord Browne's successor as chief exec, Tony Hayward?
It would be challenging to identify any specific decision or lapse by him as the cause of what is now seen as the worst oil spill in US history.
But some argue that BP was slow in recognising the gravity of the debacle after the explosion in April.
And then there's the boringly obvious point that angry shareholders, angry Gulf coast fisherman and angry US citizens have a very human need to blame someone - and if not the BP boss, then who?
It's difficult to see how Mr Hayward's tenure at BP can extend beyond his immediate management of this remarkable crisis.
I'm not sure what to make out of the precipitous slide in BP's share price. There is no doubt in my mind that some big hedge funds are making a killing on BP's CDS, and stand to make even more if they're loading up at these levels and BP shares snap back.
But for British pension funds, this BP oil disaster is a financial disaster. They're going to have a tougher time making up for these losses, and it will take time to repair the damage they sustained.