BP Plc, seen as a rising default risk by credit investors, scrapped dividends and pledged asset sales to meet President Barack Obama’s demand for a $20 billion fund to help victims of the worst oil spill in U.S. history.
BP’s Chairman Carl-Henric Svanberg met Obama at the White House yesterday and agreed on payments over four years to finance an independent body that will settle claims resulting from a damaged oil well that’s spewing as much as 60,000 barrels of crude a day into the Gulf of Mexico.
Halting the $10 billion-a-year dividend, reducing investments in drilling and selling oil and gas fields will do enough to ensure the company’s financial stability, Chief Financial Officer Byron Grote said yesterday. Credit swap contracts before the announcement showed investors pricing in a 39 percent risk of default within five years.
“It reduces the bankruptcy risk a little bit,” said Philip Weiss, senior energy analyst with Argus Research in New York. “The timing of the payments to the escrow accounts is sufficiently slow” that it increases confidence in the company’s ability to pay, he said.
BP probably would have disposed of most of the assets being considered for sale anyway, Weiss said in a telephone interview. It’s unlikely the company would sell assets like the Prudhoe Bay fields in Alaska or Gulf of Mexico holdings that would substantially reduce revenues. The blown-out well wasn’t expected to begin producing until about 2015, he said.
BP has said production growth may be reduced following the accident and that industry drilling costs will increase because of added safety requirements.
BP American depositary receipts reversed losses after the White House deal was announced to close up 45 cents, or 1.4 percent, at $32.85 in New York yesterday. Shares in the London-based company have dropped 49 percent since the Deepwater Horizon rig exploded on April 20, killing 11 workers. That’s wiped about 50 billion pounds ($74 billion) off the value of the company.
“This move protects the long-term value of BP and draws a line in the sand for the speculation and wild uncertainty that’s been thrown around,” said Jason Kenney, an analyst at ING Wholesale Banking in Edinburgh. “The hope is that it’s far too much for what is actually going to be required. This doesn’t mean the downfall of BP; it can get through this.”
Credit Score Cut
BP had come under pressure to reach an agreement with the U.S. Administration this week after Fitch Ratings lowered BP’s credit score by six to BBB, two levels above junk, on concern that costs from the spill would undermine the company’s ability to operate.
The board “believes it’s right and prudent to take a conservative financial position,” CFO Grote said on a conference call with investors. The deal to phase payments into the fund “allows us to stage our injections in a way that I hope now provides comfort to debt and equity markets.”
Speaking after his meeting with Svanberg, Obama said the fund won’t cap BP’s liability for cleanup costs or supersede the rights of individuals or states to sue the company. BP also will contribute $100 million to a fund to help support unemployed oil rig workers.
“This $20 billion will provide substantial assurance that the claims people and businesses have will be honored,” Obama said. “The people of the Gulf have my commitment that BP will meet its obligations to them.”
Chief Executive Officer Tony Hayward, who accompanied his chairman to the White House yesterday, will testify before Congress today. In prepared testimony, Hayward said he was “deeply sorry” for the Gulf explosion and oil spill. An “unprecedented combination of failures” led to the accident, he said.
“We can expect a lot less political heat going forward,” said Fadel Gheit, an analyst at Oppenheimer & Co. in New York. “BP still has an uphill battle in public opinion. Tony Hayward is walking into the lions’ den in Congress. But this gives BP a breather to regain its footing.”
BP will raise $10 billion this year selling assets, Grote said in his call with investors, concentrating on oil and gas fields that aren’t central to the company’s business. A $7 billion deal to buy offshore production assets from Devon Energy Corp. announced in March will go ahead.
In addition, the company will cut planned capital spending about 10 percent to $18 billion, Grote said. Most of the savings will come from the Gulf of Mexico, where Obama’s six-month moratorium on deep-water drilling will prevent planned investments, he said.
“BP is going to slim down significantly,” said Gheit, rated the most accurate active BP analyst by StarMine. “It’s going to survive this, but it’s going to be smaller.”
The company said in a statement it will cancel the first-quarter dividend, already announced at 14 cents a share in April and due for payment June 21. Dividend payments for the second and third quarters also will be canceled, saving a total of $7.5 billion. The company will review the dividend policy in early 2011, Grote said.
BP generated $27.7 billion in cash flow from operations last year and posted profit of $6 billion in the first quarter. BP had $5 billion of cash available, $5.25 billion of credit lines it hadn’t used and another $5.25 billion of stand-by bank facilities, BP said in an investor conference call June 4.
“BP is going to have enough money,” said Peter Hitchens, an analyst at Panmure Gordon & Co. in London. “This is the low point now. We’ve drawn a bottom line, got Obama on side and have phased payments. The market will react favorably.”