Shares of BP (NYSE:
), the second-largest European oil company, are down almost three
percent on heavy volume as the Justice Department is taking harder
stance against the company for its role in the 2010 Gulf of Mexico
oil spill. That spill was the largest in U.S. history.
New court documents show the Justice Department's harshest
tongue lashing against the British oil giant to date. The Justice
Department used verbiage such as "gross negligence" and "willful
according to Reuters
BP is in a position where it must
prove the gross negligence claims faulty
or risk paying up to $21 billion in Clean Water Act damages. That
would quadruple BP's civil damages tab, Reuters reported.
The risk to BP and the ETFs that allocate significant weights to
the stock is clear. The company was hoping for quick settlement in
the $15 billion to $25 billion range to get the overhang of the
Macondo well tragedy in its rear-view mirror. With DoJ stepping up
the rhetoric, BP will be forced to defend potentially punitive
gross negligence claims meaning the spill trial, slated to start in
January 2013, could last for far long than BP and its shareholders
want it to.
Bottom line: BP's legal woes could adversely affect the
SPDR S&P Energy Sector ETF (NYSE:
The SPDR S&P Energy Sector ETF is a curious case and not
simply because its average daily volume is barely over 1,000
reduced its BP exposure
following the 2010 spill, but the stock is now the ETF's largest
holding with a weight of 10.2 percent.
Arguably, that is enough to rattle IPW should the legal
proceedings drag on for too long or worse, go against BP. On the
other hand, if BP suffers, rivals such as Royal Dutch Shell (NYSE:
RDS-A) and Total (NYSE:
) could benefit. Those stocks combine for over 26 percent of IPW's
iShares MSCI ACWI ex US Energy Sector Index Fund (NYSE:
The iShares MSCI ACWI ex US Energy Sector Index Fund is an even
more egregious offender than IPW on the volume front. AXEN sees
average daily turnover of just 320 shares. So there is a catch-22
with AXEN. The fund's light volume might appear to make it
vulnerable to large declines on small volume. On the other hand,
underlying components are heavily traded
, which means this ETF is by no means "illiquid."
The real issue is BP is AXEN's largest holding with an
allocation of almost 8.1 percent. In addition, Transocean (NYSE:
), the owner of the Deepwater Horizon rig, accounts for almost one
percent of AXEN's weight.
Market Vectors Oil Services ETF (NYSE:
Switzerland-based Transocean, which accounts for more than five
percent of OIH's weight, still has Gulf spill financial overhang of
its own. Not to mention, DoJ has not been shy about throwing sharp
rhetoric Transocean's way, either. Unlike some of the other
partners on the Macondo well that have settled with BP, Transocean
has not done so. The company has shown it wants its day in court
and that increases the dark clouds hanging over the stock.
No stranger to litigation, Transocean is facing a
major legal tussle in Brazil, too
. Controversial and volatile, Transocean may not be large enough in
OIH to rock the ETF in the event of bad legal news. However, if
that scenario comes to pass, OIH will be worth watching because
some traders could dump Transocean in favor of steadier oil
services names such as Schlumberger (NYSE:
) and National Oilwell Varco (NYSE:
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