BP’s fall makes the FTSE more diverse

Kathleen Brooks
THE importance of BP, which makes up close to 5 per cent of the entire FTSE All Share Index, has come into sharp relief since the explosion on the Deepwater Horizon oil well in April. The stock has fallen more than 30 per cent, whereas the FTSE All Share Index has fallen by 12 per cent over the same time period. Nearly 1 per cent of that decline is down to BP.

Of course other factors have weighed on global stocks, such as the continuing debt crisis in Europe and fears that the austerity measures will de-rail the economic recovery, but its impact highlights the importance of the oil major. Companies included in the FTSE All Share Index are weighted according to their market capitalisation so if the oil company were to go under as a result of this crisis, it would destroy close to £80bn – BP’s current market capitalisation – of the FTSE 100’s value.

Even though the company’s collapse is only a remote possibility at this stage, selling pressure on its share price has abruptly ended the dominance of the oil and gas production sector in the index. It is now the second largest sector in the FTSE 100, having been overtaken by the banks, which make up 17.5 per cent (see chart).

As a result of the woes affecting BP, the FTSE is becoming more diverse, say analysts. Defensive stocks including Imperial Tobacco and GlaxoSmithKline have rallied quite strongly, leaving energy stocks lagging behind.

Later this month the quarterly reshuffling on the FTSE 100 will take place and companies whose market capitalisations have fallen below a certain point will get kicked out of the FTSE 100 and into the FTSE 250. Others such as Essar Group, another energy giant, could make their entry.

However, BP will not be affected, since the reshuffling only impacts companies that linger around the bottom of the index. And although BP has suffered a torrid time in recent weeks, it has only slipped to the third-largest company on the FTSE 100, behind HSBC and Royal Dutch Shell.

So, while everyone focuses on BP’s dividend, it is worth looking at its impact on the overall index. If its share price has any more steep lurches south then the rest of the index will risk another hammering.