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A Year of Shocks for BP

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Shareholders of BP (NYSE: BP  ) will remember April 20, 2010 for a long time to come. Until then they were a pretty satisfied bunch of people. The share price had been rising steadily over the past year, and closed the day before at 624p.

As oil prices recovered from the lows they had hit during the credit crunch, the commodities boom looked set to resume, and BP seemed a pretty good bet on rising crude prices. Everything looked set fair.

Disaster strikes
But then news started to spread of a serious accident in the Gulf of Mexico. A BP rig called the Deepwater Horizon had exploded, and 11 workers had been killed. Not only were the immediate effects of the explosion awful, but the wellhead had started to gush oil uncontrollably.

The spill would continue to spew thousands of barrels of oil a day into the Gulf of Mexico until July 15, 2010, by which time the BP share price had touched a low of 300p. The relief well that stopped the leak once and for all was finally completed on September 19.

So began what must have been the worst period in the history of BP. The oil major was made a pariah by the American government, as dire predictions were made of an ecological catastrophe.

A long-lasting impact
Although such forecasts were overblown, the accident was to have a long-lasting impact on BP and, indeed, the whole of the energy industry.

First of all, there was the financial hit. The total cost of the accident to BP has been estimated to be as much as $40 billion.

Then there was the effect on BP's reputation, which has been terribly tarnished, particularly in the States. It was largely because of this that the chief executive at the time, Brit Tony Hayward, was forced to resign, to be replaced by Bob Dudley.

And then there was the hit on the company's future growth. A substantial proportion of BP's business was in the U.S., especially off-shore, and this business was now out-of-bounds. Plus, the company had to sell off a range of non-essential assets to cover the costs of the Deepwater Horizon spill.

To compensate for the loss of reserves in the U.S., BP has been looking around the world for other sources of oil, which drove it into the arms of the Russia oil major Rosneft and the Russian government in a bold initiative to search for oil in the Arctic.

But then BP found that it had completely, and rather naively, misjudged Russian politics. The oligarchs that BP was working with in the pre-existing TNK-BP collaboration stubbornly blocked the new initiative, and Rosneft had to find a new partner, which ended up being U.S. rival ExxonMobil (NYSE: XOM  ) .

Lessons learned
So what has BP learned from all this? Well, perhaps the biggest lesson of all is that safety can no longer be just an afterthought. It has to be the No. 1 priority.

The Deepwater Horizon spill was just the last in a series of accidents, several of which have been fatal -- notably the Texas refinery fire in 2005, which killed 15 people. BP's processes and systems for dealing with safety were not up to scratch. To remedy this, Dudley has made maintaining safety a key objective in every employee's job scope.

The company has also learnt that it is becoming increasingly difficult to find new oil reserves to replace old, depleted fields. A lot of the easy pickings have either gone or are in the possession of national oil companies such as Saudi Arabia's Aramco or Malaysia's Petronas.

And as this is not the time to go deep-sea drilling in America, this leaves companies like BP having to deal with less welcoming regimes in countries like Nigeria and Russia.

Perhaps this is a sign that the much-debated theory of "peak oil" is correct, and that oil companies now have to look further and further afield to replace their dwindling oil reserves. I suspect that this could be the beginning of a long-term decline in oil reserves for companies such as BP.

Be creative
Several other Fools have highlighted just how cheap BP is at the moment -- at its current price of 405p, it is on a prospective P/E ratio of only 5.4 -- and I agree. That's why I am keeping hold of my shares in the company.

But when I think what BP could be, I look at its rival Royal Dutch Shell (NYSE: RDS-B  ) . This company is already successfully thinking outside the box, making big investments in novel energy sources such as oil sands and liquefied natural gas.

In order to drive growth into the future, I think BP needs to be just as creative, and just as good at execution. But I see little sign of this yet.

What's your view of BP right now? Let us know in the comments box below.

More on oil and gas:

Prabhat owns shares in BP.

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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 12, 2011, at 11:50 AM, PeyDaFool wrote:

    As an American BP shareholder, I would also agree that I am disillusioned with future prospects.

    I bought in at $30 a share after the spill as a deep value play but, truthfully, I thought the stock would have recovered to the $60 range by now. BP's tarnished reputation and inability to "stay in the game" may hold them back for years to come.

    Here's hoping for the future.

  • Report this Comment On October 12, 2011, at 4:53 PM, sailrmac wrote:

    I also bought during the Horizon disaster (be greedy when others are fearful) and thus baked in that turmoil. The Russian screw up was a surprise that left me with a sour taste.

    However, the current price assumes continued inept management. All they have to do is get back to average and the stock price will go up. In the meantime the dividend pays me to wait.

  • Report this Comment On October 13, 2011, at 12:07 AM, mikecart1 wrote:

    I bought way before the disaster around $35/share. Saw it go to $60/share and then fall back to the $20's after disaster. I haven't sold a share. I wish I sold at $60/share and got TOT or XOM for an oil play. BP stinks!

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