The Big Oil Spill: The Market Value Consequences of the Deepwater Horizon Disaster An analysis of the returns to shareholders in the oil industry Master Thesis in Finance Name: Paul van Doorn ANR: 897535 Faculty: Tilburg School of Economics and Management Department of Finance Supervisor: Dr. O.G. Spalt Date: 4 December 2012 Abstract This study examines the effect of ten major events in the period 2010-2012 on the share price of BP, its main competitors and suppliers in the oil industry. Five competitors and suppliers are chosen based on their market value in the first quarter of 2010. By making use of the event study methodology of Bowman (1983), this study shows that BP’s share price was significantly affected by the Gulf of Mexico oil spill in the short-term and recovered in the long-term. In contrast to BP, the share price of BP’s competitors was not significantly affected by the events concerning the Gulf of Mexico oil spill. Similar to BP, the share price of the suppliers in the oil industry has been significantly negatively affected by the Gulf of Mexico oil spill in the short- term. In the long-term, all of the suppliers, except Transocean recovered from their share price decline as a result of the Gulf of Mexico oil spill. 2 Table of Contents Abstract ........................................................................................................................................................ 2 1. Introduction ............................................................................................................................................. 4 1.1 Subject and relevance of the research ................................................................................................. 4 1.2 Research questions .............................................................................................................................. 5 1.3 Structure of the research ..................................................................................................................... 5 2. The main players in the oil industry ...................................................................................................... 6 2.1 Early and modern history .................................................................................................................... 6 2.2 The main players in the oil industry .................................................................................................... 7 2.3 Threats for the oil industry ................................................................................................................ 10 3. The BP story, from first oil to tomorrow’s energies ........................................................................... 11 4. Event description ................................................................................................................................... 15 4.1 The explosion on the Deepwater Horizon drilling rig ....................................................................... 15 4.2 Short-term economic consequences for BP ...................................................................................... 17 4.3 Long-term economic consequences for BP ....................................................................................... 18 5. Literature review ................................................................................................................................... 20 6. Event study methodology ...................................................................................................................... 21 7. Event analysis ........................................................................................................................................ 25 7.1 How did the events concerning the Gulf of Mexico oil spill affect BP’s share price? ..................... 25 7.2 How did the events concerning the Gulf of Mexico oil spill affect BP’s competitors’ share price? 29 7.3 How did the events concerning the Gulf of Mexico oil spill affect the share price of the suppliers in the oil industry? ................................................................................................................................. 33 8. Conclusion .............................................................................................................................................. 36 References .................................................................................................................................................. 38 3 1. Introduction This chapter will explain the subject and the relevance of this research. Consequently, the research questions will be presented. Last but not least, the structure of this thesis will be given. 1.1 Subject and relevance of the research The Deepwater Horizon was an ultra-deepwater offshore oil drilling rig, located in the Gulf of Mexico. The rig was owned by Transocean and had been leased to British Petroleum, BP, since its construction in 2001. During its lifetime, the Deepwater Horizon had built a strong safety record. In 2009, the Minerals Management Service even heralded the Deepwater Horizon as an industry model for safety [1]. Nevertheless, roughly a year later, on the 20 April 2010, while drilling an explanatory well in the Macondo Prospect, it suffered a catastrophic explosion and sank a day-and-a-half later. Consequently, oil started leaking into the Gulf of Mexico for 87 days. By the time the Macondo well was closed and sealed, almost 4.9 million barrels (780,000 m3) of oil had already flown into the Gulf of Mexico. Therefore, it can be considered as the largest accidental marine oil spill in the history of the petroleum industry [2]. Until now, more than 2 years after the disaster, BP is still working on restoring the environment and facing lawsuits. The huge reputation damage and costs that BP faced as a result of the oil spill, has severely affected their market value, short-term as well as long-term. BP shares closed on April 20, 2010, just before the explosion at 655,4 pence on the London Stock Exchange. Barely two months later, on June 29, 2010, BP’s share price had more than halved and hit their all-year low at 302.9 pence. Even two years later, on April 20, 2012, BP’s shares closed at 434,8 pence and are still down by nearly a third. This would indicate a decline in market value of 33% which equals $60 billion. Obviously, this is an indication that the oil spill had a huge impact on BP. It could be that the competitors and the suppliers in the oil industry had an advantage of this. Existing literature about the Gulf of Mexico oil spill mostly focuses solely on BP and other closely involved companies. In contrast, my study also includes other major competitors and suppliers that were not involved in the oil spill. Therefore, my study places the oil spill in its context by rather showing its impact on the oil industry as a whole. This already gives a good contribution to the existing literature. On top of that, whereas most existing literature focuses solely on the events in 2010, my study also includes the long-term economic consequences as it includes relevant events in 2011 and 2012 as well. To sum up, by conducting this event study I will generate more insight in the oil spill in the Gulf of Mexico in general, and the returns to shareholders in the oil industry in specific, while taking into account both the short-term and long-term. 4 1.2 Research questions Main research question: - What is the short-term and long-term impact of the deepwater horizon disaster on the return to shareholders in the oil industry? In order to answer the main research question, I have come up with the following secondary research questions: - Who are the main players in the oil industry? - What events took place concerning the Gulf of Mexico oil spill? - How did the events concerning the Gulf of Mexico oil spill affect BP’s share price? - How did the events concerning the Gulf of Mexico oil spill affect BP’s competitors’ share price? - How did the events concerning the Gulf of Mexico oil spill affect the share price of the suppliers in the oil industry? 1.3 Structure of the research In the second chapter of this thesis the rise of the oil industry is discussed and its main players are identified. Consequently, in chapter 3, a closer look will be taken at the background of BP as it is the main player in the Gulf of Mexico oil spill. Next, the most important events concerning the oil spill will be identified in chapter 4. Chapter 5 provides a short literature review where the appropriate event study methodology is identified, which in turn is discussed in chapter 6. Finally, in chapter 7 the results of the event study will be presented and analyzed which answer the last 3 secondary research questions. Last but not least, chapter 8 contains the conclusion and provides an answer to the main research question. Further research topics are recommended. 5 2. The main players in the oil industry First, this chapter gives an overview about the early and modern history of the petroleum industry. Next, the main players in the oil industry will be discussed. Aside from BP, five competitors and five suppliers in the oil industry with the highest market value in 2010 are identified and will be used in the event study in chapter 7. The chapter ends with discussing future threats to the oil industry in paragraph 2.3. 2.1 Early and modern history Petroleum, in an unrefined state, has been used since ancient time to keep fires ablaze, and