UPDATE: BP Slashes Spending To Build $20B Gulf Oil Spill Fund

16th Jun 2010 21:49

LONDON (Dow Jones)--BP PLC (BP) Wednesday said it would 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 a $20 billion fund over the next three and a half years to pay for damages related to the Gulf of Mexico oil spill and set aside more cash for unknown future costs. BP struck the agreement with President Barack Obama at the White House amid intense political pressure spurred by a steady stream of oil spewing into the Gulf and washing up on beaches and marshes. "We regret the cancellation and suspension of the dividends, but we concluded it was in the best interests of the company and its shareholders," Chairman Carl-Henric Svanberg said. BP Chief Financial Officer Byron Grote said in a conference call the deal gives the embattled company a more constructive "partnership" with the Obama administration, whose fierce criticism of the company has played a big part in a steep collapse in its share price recently. However, analysts reacted cautiously. NCB Stockbrokers analyst Peter Hutton said BP may have difficulty selling the deal to investors and groveling statements from Svanberg at the White House indicate the company has "rolled over" to Obama's demands. "Providing clarity is good --but this provides clarity that BP has lost the negotiations on just about all fronts," Hutton said. "The headline in States after World Cup was 'US wins 1-1'. In this match, it is more like 12-0." 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 paid in, BP said in a statement. "The fund doesn't represent a cap on BP liabilities," Grote said. The funds in the account, which will be controlled by an independent body, will be available to satisfy legitimate claims including environmental damages and state and local response costs. Fines and penalties will be excluded from the fund and paid separately, BP said. Grote said BP will have no clarity on the ultimate liabilities and penalties from the Gulf of Mexico oil spill until later in the year, when the leaking well has been capped, and will maintain a conservative approach to its financial position until then. BP's board is focused on long-term development of the company and will reduce spending to ensure that cashflows exceed its liabilities in the coming quarters, Grote said. The company will cut its organic capital expenditure this year by 10% to $18 billion and by a greater amount in 2011, with most of the cut in upstream operations, he said. The $10 billion of divestments now planned this year will focus on non-strategic assets in BP's exploration and production division, Grote said. BP still expects to close its $7 billion purchase of assets in the Gulf of Mexico, Brazil, Canada and Azerbaijan from Devon Energy Corp. (DVN) by the end of this year, he said. "The board will consider resumption of dividend payment in 2011 at the time that we announce our fourth quarter 2010 results. At that stage we would expect to have a much clearer picture, a much better definition on the longer term impact of the Deepwater Horizon incident," Grote said. BP will keep its gearing level, the ratio of net debt to net debt plus equity, in the 20% to 30% target range, he added. An April 20 explosion aboard the Deepwater Horizon drilling platform killed 11 workers and led to the massive oil and natural gas leak. BP's American depositary shares jumped Wednesday afternoon following the announcements from the White House and the company. -By James Herron and Jeffrey Sparshott, Dow Jones Newswires; +44 (0)20 7842 9317; [email protected] (END) Dow Jones Newswires June 16, 2010 16:49 ET (20:49 GMT)