>>BP Dividend ‘Off the Table’ as Obama Demands Gulf Spill Fund
By Brian Swint
June 16 (Bloomberg) -- BP Plc will suspend its $10 billion dividend as President Barack Obama’s demand to set aside cash for the Gulf of Mexico spill stretches the company’s finances, analysts said.
“The dividend is off the table,” said Alastair Syme, an oil and gas analyst at Nomura Holdings Inc. in London. “Until they have some clarity on the costs of the spill, they can’t do anything.”
BP Chairman Carl-Henric Svanberg will meet Obama at the White House today to discuss how to compensate victims of the spill after Obama in an Oval Office address yesterday called for creation of a fund. Lawmakers, who will question Chief Executive Officer Tony Hayward tomorrow, have said the company should suspend the dividend and put $20 billion in an independently administered escrow account to pay claims.
Bloomberg forecasts show that BP is unlikely to pay a cash dividend in the second and third quarters. BP’s payments accounted for about 14 percent of all dividends in the U.K.’s benchmark FTSE 100 stock index last year. Fitch Ratings yesterday lowered BP’s credit score by six grades to BBB, two levels above junk, on concern costs will escalate.
“Hayward’s response to the president is very important, and the dividend could be fairly easy to give,” said Gudmund Halle Isfeld, an analyst at DnB NOR ASA in Oslo. “If I were an investor, I would say it’s okay to suspend the dividend for a quarter or two to ensure the company gets through the storm.”
BP spokeswoman Sheila Williams said no decision on the second-quarter dividend has been made.
Fitch said it would be “surprised” if BP didn’t suspend the quarterly payout until the full costs are known. Cleanup and liabilities may reach $40 billion, Standard Chartered Plc estimated last week.
‘Lack of Access’
“It’s not financially obvious how they could set up an escrow, given their credit rating and lack of access to credit markets,” Nomura’s Syme said. “It’s in the interest of BP to do something rather than nothing but they’re constrained by liquidity.”
Credit investors are pricing in a more than 39 percent chance BP will default within five years. The rising risk implied by credit-default swaps is up from 7 percent a month ago, according to CMA DataVision.
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. Fitch said yesterday it expects BP’s lenders to allow the company to use the credit lines if needed.
BP generated $27.7 billion in cash flow from operations last year and posted profit of $6 billion in the first quarter. Capital spending will total about $20 billion the company said in this year’s strategy presentation.
Cleaning Up
The company has spent about $1.6 billion on containing and cleaning up the spill so far.
If BP maintains its dividend this year at the 2009 level the dividend yield, or annual payout as a percentage of the current share price, will be more than 10 percent. That compares to 2.8 percent for Exxon Mobil Corp. and 5.9 percent for Royal Dutch Shell Plc.
“BP has the strength of balance sheet and free cash flow to sustain dividends at existing levels for now,” Collins Stewart analyst Gordon Gray wrote in a note today. “However, the rising level of public anger in the U.S., including pressure for BP to establish an escrow account for spill compensation, now point to the likelihood that BP will not pay a cash dividend for the second quarter.”
To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.
Last Updated: June 16, 2010 06:36 EDT
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