The major oil spill in the Gulf of Mexico has taken a huge toll on BP’s sharevalue – almost halving it since the spill began in mid-April.
It is of great importance to the FTSE index of 100 leading companies and the country’s pension funds – but what impact will the decline in value have in practice?
What has happened to my BP shares?
Financially speaking, the most direct impact has been on BP shareholders who have seen the value of their shares halve since the spill on 20 April.
The impact on BP’s share price has two main drivers.
Firstly, concerns over the eventual cost of the spill, which is far from clear. The amount is rising by the day and no-one knows how big or how long the clean-up operation itself will be. Even harder to quantify is the eventual bill for compensation to businesses and workers affected by the spill and fines that the US government has said BP will have to pay.
Secondly, there are fears that the company could cut its dividend (the quarterly payment it makes to shareholders). It is under intense pressure in the US not to pay the next one until the full extent of the spill is known.
You can add a third, too, and that is the usual nervousness investors display when any company suffers adverse publicity or uncertainty surrounds its future.
What about the dividend?
The first thing to point out is that BP has not yet changed its dividend policy. Current BP shareholders will get the latest dividend (about 9.5 pence per share) on 21 June.
But BP has said it is considering what to do about the next dividend, which it is due to announce on 27 July.
If it does decide to not pay it or to defer it, this will clearly affect BP shareholders, some of whom may have chosen BP because it has in the past been a regular dividend payer.
I’m saving into a pension. Will this affect me?
Many BP shareholders will be pension funds. So the fall in the value of its shares and any cut in the dividend will have an impact. The question is how big.
Pension funds nowadays only have about 25% of their money invested in UK shares (most of which is in the FTSE 100 index). The rest is in the likes of overseas shares and bonds.
So the National Association of Pension Funds (NAPF), which represents a large part of the UK pension industry, estimates that 1.5% of members’ money is invested in BP.
You could use the same sort of rough arithmetic on dividend income, too. £1 in every £7 of dividend income from FTSE 100 companies comes from BP. But, as described above, pension funds have many more sources of income than the FTSE 100.
And that’s one pound in every seven paid to all investors – many of which will be outside the UK.
BP’s own research says it accounts for 8% of UK pension fund income.
The NAPF is not trying to say there is minimal impact on pension funds, but to put it in some kind of perspective.
I have already retired. Could my pension be affected, too?
If you are already receiving your pension after saving hard for years, recent falls in BP shares or any cut in the dividend will not affect the income you receive.
That’s the same whether you are in your former employer’s final-salary scheme, which guarantees to pay a percentage of your last salary, or if you have already bought an annuity with a private pension pot. It won’t, of course, affect the state pension either.
And if you are nearing retirement, don’t forget that most funds switch out of shares as retirement draws near.
What about other investments?
BP is likely to feature in a wide range of popular investments, from FTSE 100 index tracker funds, which are far and away the most popular type of share investment, to unit trusts and Child Trust Funds. You may well have exposure without knowing it.
So is it time to sell my BP shares or get out of related investments?
A decision for you, I’m afraid, and not something we can advise on. Bear in mind some investments may incur penalties if you want to get your money out early.
Can it not afford to pay a dividend anymore?
If BP decides not to pay the next dividend, it probably won’t be because it can’t afford it.
BP’s latest assessment of the costs to date are $1.43bn (£1bn). Chief executive Tony Hayward said in an interview a couple of weeks ago the total cost would be $2-3bn. Most experts agree the long-term costs will probably be a lot higher.
BP has a strong balance sheet with relatively low levels of borrowing – it can afford to borrow a lot more if it needs to. And the current oil price is well above BP’s cautious long-term assumptions so plenty of cash is being generated.