BP hit by fears of $20bn demand for Gulf clean-up

BP hit by fears of $20bn demand for Gulf clean-up

BP shares tumbled more than 9% today as news that US politicians want the oil giant to set aside $20 billion (£13.5 billion) to pay compensation claims alarmed investors.

The demand from two Senators for BP to put the money in an escrow account intensified fears about the group's ability to pay dividends and grow its business in future. The share price closed down 36.45p or 9.3% at 388p as more than 134 million shares traded hands, more than three times the average daily amount. The shares have now lost nearly 41% of their value since the fire at the Deepwater Horizon well in the Gulf of Mexico killed eleven workers back and started the immense oil spill at the end of April.

The latest fall comes as BP's board meets to decide how it can balance the need to pay claims and clean-up costs and invest in the future of the business and its long-standing commitment to pay a dividend.

Some reports suggests the oil giant may lose control of its US oil and natural gas wells and be barred from doing business with the federal government.

Stephen Pope, chief global market strategist at Cantor Fitzgerald, said that while current prices may seem overly pessimistic, there are reasons to be worried about BP's future growth prospects. 'The fear is based upon the fact that the estimated cost of dealing with the oil gusher and the associated pollution is shifting all the time and over time that figure is going higher,' he said.

He points out BP generated 36.1% of total revenue from the US in 2009 but that could well be curtailed in the future as deepwater drilling faces an extended moratorium and BP could be forced to sell assets, he said.

'I see BP as having to adopt a lower profile in the US for years to come and focus on having its names associated with doing good work in cleaning up the environment and assisting the local economy,' he said.

While Obama has not said how much he wants set aside, senior politicians have said they don't believe BP should pay a dividend until the full cost of the spill is known.

Finance director Byron Grote recently told analysts and investors BP has financial flexibility to help finance the clean-up. He pointed out the group has $5 billion in cash and a number of agreements with banks which mean it could free up more cash. He said debt is at the low end of the group's targeted range.

But while most analysts agreed this gave the group plenty of flexibility, investors are increasingly worried that the escalating demands from the US government mean BP will have to suspend one if not more quarterly dividend payments this year.

On Friday, BP rubbished claims it had already decided to put the money for its dividend in an escrow account. But since then the political pressure from the US has escalated. BP hasn’t missed a dividend payment since the early 1990s.

Its payout accounted for a sixth of all dividend payments in the FTSE 100 last year and a decision to suspend payment would have an impact on as many as 18 million savers and investors in the UK.

Widespread outrage in the US about the extent of the spill and a belief BP was ill-prepared to deal with it has built pressure on US politicians to be seen to be tough with BP ahead of elections in November.

source: citywire.co.uk