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Business owners curious to know how investors would value their companies should pay attention to the British Petroleum PLC oil spill.  The incident illustrates how uncertainty can drive down value faster and more dramatically than any other single factor.  

As everyone knows by now, on April 20, 2010 a BP semi-submersible exploratory offshore drilling rig in the Gulf of Mexico exploded after a blowout and sank two days later, killing eleven people and causing a massive oil spill threatening the coast of Louisiana, Mississippi, Alabama, Texas, and Florida.  BP executives have refused to publically estimate the clean-up costs, but reports it has already spent over $1 billion and the ultimate cost may be many times that. 

BP is the fourth largest company in the world.  In 2009 it had revenues of $239 billion, $235 billion in assets and 80,000 employees.  Few companies are better positioned than BP to sustain the financial costs of a major disaster yet remain in business.  But since April 20, the stock market has knocked over $70 billion from BP’s market capitalization (that is, its fair market value).  Investors have sliced BP’s value by much more than the likely cost of the cleanup.

Why? 

In a word: uncertainty.  Many factors affect a company’s value – the economy, its industry, its management, the strength of its balance sheet and hundreds of others – but nothing affects an investor’s perception more than uncertainty.  The broken pipe on the floor of the Gulf of Mexico is belching out more than just oil – it is pumping out doubts about BP’s future.  Doubts about its ability to drill in the Gulf of Mexico.  Doubts about possible government fines.  Doubts about litigation costs.  So far the cost to BP of this uncertainty is $70 billion, and until the uncertainty gets resolved that number is likely to grow. 

The lesson owners should take from BP’s woes is that if you can show investors a steady historical trend and give them confidence about your company’s future (and its predictability), they will value your business more highly.