2nd UPDATE: BP Shares Rise Despite Fitch Six-Notch Downgrade

15th Jun 2010 12:45

(Adds analyst comment.) By James Herron Of DOW JONES NEWSWIRES LONDON (Dow Jones)--BP PLC's (BP) shares traded flat Tuesday despite Fitch Ratings downgrading its long-term issuer default rating to BBB from AA, citing significantly higher estimates for the size of the oil spill in the Gulf of Mexico and demands from U.S. authorities that the company pay a substantial amount of the expected cleanup and compensation costs up front. In contrast to the severity of the six-notch cut in its rating--two notches above junk--BP remains at investment grade and the market shrugged off the announcement. At 1135 GMT, BP shares traded flat at 356 pence. Its shares closed down more than 9% Monday. The FTSE 100 index was up less than 1%. "The scale of today's rating action has been partly driven by the increased risk that the balance between long-term and near-term cost payments may now be skewed much more heavily towards the near-term than previously anticipated," Fitch said. A number of Senate Democrats, including Senate Majority Leader Harry Reid (D, Nev.), demanded Tuesday that BP deposit $20 billion into an escrow account to cover future cleanup and compensation costs. The figure dwarfs the $1.6 billion BP has spent since April 20 on containment, cleanup and compensation resulting from the oil spill and is at the high end of analysts' estimates of the ultimate liability. ING analyst Jason Kenney said it is rash to make judgments based on the Senate's demands. "$20 billion just for cleanup is well overstated ... it's an opening shot" in negotiations with U.S. authorities, he said. BP said it has spent $1.6 billion on containment, cleanup and compensation operations in the Gulf of Mexico so far. The company does not break down that figure, but Kenney estimates that two-thirds of the money has been spent on the complex offshore operations to contain the spill, such as the containment dome, the top kill and the lower marine riser package that currently is capturing about 15,000 barrels of oil a day. "They are probably going through the most expensive phase now ... the mobilization of people and the mobilization of kit offshore," he said. Once the relief wells are completed in August, BP's rate of spend will drop significantly and the full liability, including future litigation costs, will be around $7 billion, Kenney said. Fitch said the rating cut also was prompted by the increase of the top-end spill estimate to 40,000 barrels a day, from 25,000 barrels a day previously, because it "materially increases BP's exposure to Justice Department fines payable in the near- to medium-term," it said. BP could face maximum civil penalties of $1,100 per barrel of oil spilled, rising to a maximum of $4,300 per barrel spilled if BP were to be proved negligent. Assuming oil continues to leak from BP's well until August, Fitch estimated BP's share of these maximum penalties at $2 billion and $8 billion, respectively. These problems, and the "severely adverse" reaction in BP shares, may put limitations on BP's ability to access capital markets, it said. "Fitch would be surprised if BP did not suspend quarterly cash dividend payments until the operational and financial impact of the incident is clearer." Fitch changed the outlook on BP's rating to "evolving," reflecting the high level of uncertainty surrounding the company, it said. "It is still possible that payments may either turn out to be much lower than Fitch's expectations, or that they may be skewed more to the longer-term, both of which would be favorable for BP's credit profile," it said. "I do still believe the financials of BP will be more than capable of covering this," said Kenney. -By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317; [email protected] (END) Dow Jones Newswires June 15, 2010 07:45 ET (11:45 GMT)