Master Thesis Investment Analysis “The BP-oil spill, a crisis for BP or for the whole industry?” Author: A.H. Meeuwissen Anr: 205668 Nr: 06-83698417 Department of finance Faculty: School of Economics and Management Supervisor: Dr. Paul Sengmüller Second review by: to be announced Graduation Date: 30-08-2012 Word count: 13,620 words | P a g e ii Abstract This study contains 46 oil spills of public firms between 1978 and 2010. The reaction of the stock market is examined when an oil spill occurs. The cumulative abnormal return for responsible companies is significantly negative for 32 days after the announcement, with, on average, the most negative cumulative abnormal return of -3,75%. The cumulative average abnormal returns for competitors stay significantly positive up to an event window of 120 days after the announcement, reaching the highest point after 120 days with a cumulative return of 4,1%. Both effects are significant immediately after the announcement of an oil spill. With cross-sectional regressions, this study finds that the size of the oil spill, measured as either the estimated loss of oil and the number of hits in the media ten days after the spill, has an influence on the outcome of the economic effect of both responsible companies and their competitors. A higher size of the oil spill results in worse economic results for responsible companies, and in better economic results for competitors for at least ten days after the spill. | P a g e iii Table of Contents CHAPTER 1: INTRODUCTION .................................................................................................................. 1 1.1 SUBJECT AND RELEVANCE OF THE RESEARCH ....................................................................................... 1 1.2 STRUCTURE OF THE RESEARCH .............................................................................................................. 2 CHAPTER 2: OVERVIEW BP OIL CRISIS ................................................................................................ 3 2.1 TIMELINE OF THE DEEPWATER HORIZON OIL SPILL ............................................................................... 3 2.1.1 Timeline of the oil spill .......................................................................................................................... 3 2.1.2 Political actions because of the oil spill ................................................................................................ 5 2.2 EFFECT OF AN UNNATURAL DISASTER ON COMPANIES .......................................................................... 7 2.3 PARTIAL CONCLUSION ........................................................................................................................... 9 CHAPTER 3: HYPOTHESES ..................................................................................................................... 11 CHAPTER 4: DATA AND METHODOLOGY .......................................................................................... 13 4.1 DATA RESOURCES AND SAMPLE SELECTION ........................................................................................ 13 4.2 THE SAMPLE ........................................................................................................................................ 14 4.3 METHODOLOGY .................................................................................................................................. 17 CHAPTER 5: EMPIRICAL RESULTS ...................................................................................................... 21 5.1 ANNOUNCEMENT RETURNS FOR RESPONSIBLE COMPANIES COMPARED TO THE MARKET ..................... 21 5.2 COMPARISON BETWEEN RESPONSIBLE COMPANIES AND THEIR COMPETITORS ..................................... 23 5.2.1 Announcement returns for competitors compared to the market ......................................................... 24 5.2.2 The difference between responsible companies and the competitors .................................................. 26 5.3 THE IMPACT OF THE TWO SIZE VARIABLES ON THE ABNORMAL RETURN ............................................. 27 5.3.1 Size as the extent of media coverage ................................................................................................... 28 5.3.2 Size as the amount of oil spilled .......................................................................................................... 32 5.3.3 Partial conclusion ............................................................................................................................... 34 CHAPTER 6: CONCLUSION ..................................................................................................................... 37 6.1 CONCLUSIONS FOR THE THREE HYPOTHESES ....................................................................................... 37 6.2 THE FINAL ANSWER TO THE RESEARCH QUESTION ............................................................................... 39 6.3 CONCLUDING REMARKS ...................................................................................................................... 40 | P a g e iv REFERENCES ............................................................................................................................................. 41 ARTICLES .................................................................................................................................................. 41 WEBSITES ................................................................................................................................................. 42 APPENDICES .............................................................................................................................................. 43 APPENDIX 1: SPILL CHARACTERISTICS ...................................................................................................... 43 APPENDIX 2: OVERVIEW VARIABLES ........................................................................................................ 45 APPENDIX 3: ANALYSIS RESULTS .............................................................................................................. 47 | P a g e v Chapter 1: Introduction This chapter will explain the subject and the relevance of this research. This will result in the research question for this thesis. Furthermore, the structure of this thesis is presented in the second paragraph. 1.1 Subject and relevance of the research On the 20 th of April, a gas release created an explosion on the Deepwater Horizon oil rig in the Macondo exploration well in the Gulf of Mexico. The fire kept burning for 36 hours before the rig sank. After this, hydrocarbons leaked into the Gulf of Mexico and this lasted for 87 days. Only then, the well was closed and sealed. This accident led to the death of eleven people, and 17 others were injured. Estimated is that almost 4.9 million (780,000 m 3) barrels of oil were lost in this spill. 1 Until the moment of today, BP is still working on restoring the environment and the economy. This confirms the large scope of this disaster. Obviously, such a gas release does not have a good influence on the image of BP. Less clear is what the exact magnitude of the losses are, and what is has done for the total oil industry. A quick look at the share price of BP can already give some indications. On the 20 th of April, the share price ended on 655,4 pence on the London Stock Exchange. The lowest point that year was reached on June 29, when the share price was down to 302,9 pence. This is less than halve of the end share price on April 20. Obviously, this is indeed an indication that the oil spill has had a huge impact on BP. It could be that the competitors of BP had an advantage of this, and therefore improved in that period. In other words, have the competitors of BP done better after the 20 th of April, or did the oil spill have a negative influence on the total oil industry? This raises the question if this can also be stated for other oil spills. What are the economic consequences for either the responsible company and the their competitors? This leads to the following research question for this thesis: Does an oil spill have a negative economic effect on either the company responsible for the spill or on their competitors, and does the size of the oil spill affect the outcome? 1 Source: http://en.wikipedia.org/wiki/Deepwater_Horizon_oil_spill | P a g e 1 Existing literature about disasters is mostly focusing on natural disasters (Worthington and Valadkhani, 2005), while this study focuses on oil spills, where the cause and responsibility lays with companies. In other words, this study focuses on an analysis of one kind of an industrial disaster. This already gives a good contribution to the existing literature. Moreover, most existing literature concentrates on single events (Worthington and Valadkhani, 2005), while this study will analyze different oil spills. The latter part of the research question also gives a fine contribution to the existing literature. This study will examine two different kinds of size, and compares the impact of the different proxies. The first kind of size is the size of the spill itself, or even better: the assumption of the oil lost because of the spill around the day of the start of the spill. The second kind of size is the magnitude as in the attention it gets in the media. If a spill gets a lot of attention in the media, it could have a bigger impact on a company compared to a spill with