BP Rebounds on Agreement to Phase in Oil Spill Fund Payments

By Eduard Gismatullin
June 17 (Bloomberg) -- BP Plc rebounded the most in 19 months and the cost of insuring the company against default fell after an agreement to phase in payments to a $20 billion fund to compensate victims of the worst oil spill in U.S. history.
BP scrapped dividends and pledged asset sales yesterday to meet President Barack Obama’s demand to set up the fund in response to the Gulf of Mexico oil spill. Its shares have slumped 45 percent since the Deepwater Horizon rig exploded on April 20, wiping about 55 billion pounds ($80 billion) off the London-based company’s value.
"It brings some clarity, but obviously we still don’t know whether $20 billion will be enough or whether the company will need more," said Colin Morton, who helps manage about $1.7 billion at Rensburg Fund Management in Leeds, England. "If this is the final cost, it’s more than adequately reflected in the price."
Chief Executive Officer Tony Hayward, who will testify before Congress today, said in prepared testimony that he was "deeply sorry" for the explosion and spill. BP’s Chairman Carl-Henric Svanberg agreed on payments over four years to finance an independent body that will settle claims resulting from the damaged oil well after a meeting with Obama at the White House yesterday.
BP jumped as much 9.7 percent, the biggest intraday gain since November 2008, and traded at 361.25 pence as of 10:22 a.m.
in London. The shares fell 1.5 percent yesterday to 337 pence, the lowest since April 1997.
Halting the 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.

Provides Comfort

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," Grote said.
BP had faced increased pressure from U.S. lawmakers to settle damage claims and suspend the dividend in the run-up to yesterday’s meeting at the White House.
"A line has been drawn," said Manoj Ladwa, a London-based senior trader at ETX Capital. "It’s likely that we are going to see less of the aggressive rhetoric that we saw out of the U.S.
administration going forward."
The agreement to cut three quarters of dividend payments and set up the fund removed BP from a four-hour stint among companies the bond market labels distressed.
BP’s bonds rose, with the spread on its 1 billion euros of
4.5 percent notes due November 2012 narrowing to 555 basis points from 696 basis points yesterday, according to HSBC Holdings Plc prices on Bloomberg. The yield premium on the 500 million pounds of 4 percent bonds due December 2014 was at 410 basis points, from 411 basis points.

Bonds, Swaps

The company’s bonds were the most active in U.S. trading yesterday. BP’s $750 million of 1.55 percent notes maturing in
2011 increased 2.25 cents to 94.5 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The cost of protecting BP’s debt against default for one year fell 461.5 basis points to 535.5, after climbing as high as
1,075 yesterday, CMA DataVision prices show.
BP’s American depositary receipts reversed losses after the White House deal was announced to close up 45 cents, or 1.4 percent, at $31.85 in New York yesterday.
"A more normal political atmosphere and measures to address debt concerns will emphasize that the shares have sold off too far," Jon Rigby, an analyst at UBS AG, wrote in a note to clients. UBS cut its price target on the shares by 10 percent to 525 pence.

Low Point

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.
Share gains may be limited after 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.
"There seems to be some relief in the United States, but I’m not so sure about some investors, particularly the income funds, will be quite so sanguine about this," said Peter Hutton, a London-based analyst at NCB Stockbrokers Ltd.
BP has spent about $1.6 billion on containing and cleaning up the spill so far. The company’s spending for cleanup and liabilities may reach $40 billion, Standard Chartered Plc estimated last week.
The U.S. government this week increased its estimate of the oil leak to 35,000 to 60,000 barrels a day.
"Even if the final cost totals $40 billion and BP is liable for 100 percent, the shares look oversold," Richard Griffith, a London-based analyst at Evolution Securities Ltd., wrote in a report.
Still, he urged caution about buying the shares until after the so-called relief wells BP is drilling to plug the bottom of the damaged well are completed in August.