BP is one of the world’s leading international oil and gas companies. BP was founded in 1908. Today, BP has its headquarters in London. BP provides their customers with energy for heat and light, fuel for transportation and a lot more services.
At one of BP’s oilrigs, “Deepwater Horizon” in the Gulf of Mexico, an accident occurred on 20 April 2010. A gas release and subsequent explosion cost 11 people the land resulted in 4.9m barrels of oil being discharged, threatening marine life and hundreds of miles of coastline.
After this accident, the US government wanted BP to use the profit to pay for the Gulf of Mexico clean up instead of paying dividends to their shareholders, which put BP under intense pressure.
Table of Contents
1. Introduction
2. The irrelevance of payout policy
3. Information effects and signaling
4. Homemade dividends and transaction costs
5. Share Buybacks
6. Conclusion
Objectives and Topics
The paper examines the impact of the 2010 Deepwater Horizon disaster on BP's dividend policy and the subsequent consequences for shareholder value, analyzing these decisions through the lens of established financial theories.
- Theoretical analysis of dividend irrelevance (Miller & Modigliani)
- The role of information effects and market signaling in dividend decisions
- Financial implications of corporate crises on payout policies
- Evaluation of share buybacks as an alternative to dividends
Excerpt from the Book
Information effects and signaling
According to MM, the information effect can be consistent with their irrelevance theorem because “the announcement of a change in dividends provides the occasion for a change in share price, but the change in dividends is not itself the cause of the price change” (Peirson, Brown, Easton, Howard, Pinder, 2012, p.354).
BP was under intense pressure from the government and the community when the accident occurred. Both were expecting BP to use their money for clean-up, environmental remediation and economic development (Wall Street Journal, b, 2015).
In addition, BP will have to pay for claims and fines. Those costs will likely be spread over several years. This leads to an expected gearing of 23% by the end of 2013 which is below the targeted gearing ratio of up to 30% (Wall Street Journal, a, 2010).
BP’s year-end net debt in 2010 would have been about $31 billion and an extra debt capacity of about $17 billion. (Wall Street Journal, a, 2010). First year’s pretax clean-up costs would be about the same. That are the reasons why BP could have handled the costs without touching dividends, as stated in the article (Wall Street Journal, a, 2010).
Summary of Chapters
Introduction: Provides an overview of BP as a company and the catastrophic events of the Deepwater Horizon accident in 2010.
The irrelevance of payout policy: Introduces the Miller and Modigliani theorem regarding dividend irrelevance and contrasts it with empirical evidence regarding share price reactions.
Information effects and signaling: Discusses how dividend announcements serve as signals to the market and evaluates BP's financial capacity to maintain dividends during the crisis.
Homemade dividends and transaction costs: Explains the concept of shareholders creating their own liquidity through share sales and the associated transaction costs.
Share Buybacks: Examines share repurchases as an alternative mechanism to distribute cash and why this was not an optimal signal in BP's specific situation.
Conclusion: Summarizes the actual impact on BP's share price and mentions the long-term financial burden of legal claims following the disaster.
Keywords
BP, Deepwater Horizon, Dividends, Dividend Irrelevance, Miller and Modigliani, Share Price, Signaling, Information Effect, Payout Policy, Homemade Dividend, Transaction Costs, Share Buybacks, Corporate Finance, Shareholder Value, Oil Spill
Frequently Asked Questions
What is the core subject of this paper?
The paper analyzes the financial decision-making process of BP regarding dividend payouts following the 2010 Deepwater Horizon oil spill.
What are the primary themes discussed?
The main themes include dividend policy theory, the impact of crisis on corporate finance, signaling theory, and the mechanisms of shareholder remuneration.
What is the main objective of the research?
The goal is to evaluate the benefits and drawbacks of BP's dividend decisions after the accident and the subsequent effects on their shareholders.
Which scientific theories form the basis of the analysis?
The analysis primarily utilizes the Dividend Irrelevance Theorem proposed by Miller and Modigliani (1961).
What topics are covered in the main body?
The main body covers payout policy theory, the signaling effects of dividends, the concept of homemade dividends, and the feasibility of share buybacks.
Which keywords best characterize this work?
Key terms include Dividends, Signaling, Dividend Irrelevance, BP, and Shareholder Value.
How did the Deepwater Horizon accident affect BP's dividend policy?
BP omitted their dividend payouts for the first three quarters of 2010 due to extreme pressure from the US government and the need to fund cleanup efforts.
What was the observed effect on BP's share price?
Between April and June 2010, BP's share price plummeted significantly, falling by 55% to reach a 13-year low.
- Arbeit zitieren
- Anonym (Autor:in), 2016, Dividends in a Real-World Setting. BP’s situation and dividend decision after the Deepwater Horizon accident in 2010, München, GRIN Verlag, https://www.grin.com/document/371068
