2nd UPDATE: BP Shares Surge After $20B Oil Spill Fund Deal

17th Jun 2010 12:45

(Adds analyst comment.) By James Herron Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Shares in U.K.-listed oil giant BP PLC (BP) jumped as much as 9.8% in London Thursday after the company struck a deal with the Obama administration a day earlier to set aside $20 billion to cover Gulf of Mexico oil spill costs by slashing spending. At 1130 GMT BP shares were up 7.1%, or 24 pence, at 361p, leading the FTSE 100 index. Several analysts upgraded the embattled company to a "buy" recommendation, despite BP's promise to cancel at least $7.8 billion in dividends, sell off $10 billion in assets and reduce capital expenditure by at least $4 billion as it looks to build up the $20 billion fund over the next 3 1/2 years. The fund will not cover civil or criminal penalties. "BP's package agreed with President Obama should cool the political heat and provide some degree of comfort to equity and bond markets, shareholders," said Evolution Securities analyst Richard Griffith. BP struck the agreement with U.S. President Barack Obama, whose fierce criticism of the company has played a big part in a steep collapse in its share price recently. BP Chief Financial Officer Byron Grote said the deal gives his embattled company a more constructive "partnership" with the Obama administration. "This process may be seen as a necessity if BP is to have a long term future in the U.S., and it should give BP a starting base for re-establishing its relationships with key U.S. administrators," said Collins Stewart analyst Gordon Gray. Aside from the political aspects, the only advantage of the deal for BP was the scheduling of payments to the $20 billion fund over more than three years, "which avoids an emergency call on debt," said NCB Stockbrokers analyst Peter Hutton. BP will pay $3 billion into an escrow account in the third quarter of this year and another $2 billion in the fourth quarter. This will be followed by payments of $1.25 billion per quarter until the $20 billion has been fully paid. Some industry analysts, notably Fitch who downgraded BP debt six notches to just above junk Tuesday, feared that the U.S. authorities would demand the $20 billion up front, crippling BP financially. While the deal has eased these fears, analysts warned it still faces highly uncertain long-term liabilities. "It doesn't cap BP's liabilities nor cover fines and penalties but does clarify how BP will settle legitimate claims and cleanup costs," said Evolution Securities' Griffith. NCB's Hutton added that BP would have to gradually set aside an additional cash reserve of $10 billion to deal with future costs. Bank of America Merrill Lynch downgraded BP to neutral, saying the deal with Obama did not provide enough clarity on BP's ultimate liabilities and "will materially erode BP's competitive advantage versus peers for the foreseeable future." Nobody expressed much doubt that BP could meet its current and future obligations. "Against this year's forecast $32 billion of cashflow, the escrow payments of $5 billion and capex of $18 billion should be easily accommodated," said Citigroup analyst Mark Fletcher. The cost of insuring BP debt contracted sharply Thursday morning. At 1000 GMT, BP credit default swaps were trading at 400 basis points, compared with an all time high of 625 basis points on Wednesday. "Even if the final cost totals $40 billion and BP is proven liable for 100% [of the costs], the shares look oversold," said Griffith. Company Web site: http://www.bp.com -By James Herron, Dow Jones Newswires +44 207 842 9317; [email protected] (Art Patnaude contributed to this article.) (END) Dow Jones Newswires June 17, 2010 07:45 ET (11:45 GMT)