UPDATE: BP WATCH: BP Shares Jump On Dividend Cut, $20B Fund

16th Jun 2010 20:44

(Updates throughout with information about dividend cut, additional details on escrow fund, market and investor reactions.) By Donna Kardos Yesalavich Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--BP PLC's (BP, BP.LN) American depositary shares jumped Wednesday afternoon after the oil giant said it won't issue further dividends this year and confirmed an agreement to set aside $20 billion to help pay for claims as a result of the Gulf oil disaster. BP's U.S. shares were up 3.8% in recent trading to $32.57 after spending much of Wednesday's session in the red. News of the dividend cut and the escrow fund helped bring some clarity to investors who had wondered whether the company would continue paying the dividend and what BP's liabilities might be. The market is seeing the moves as positive indications that BP is working with the Obama administration in a cooperative manner that could help it in the long run, both financially and from a sentiment standpoint. "For the most part, the market was expecting some kind of cut," said Nick Kalivas, strategist and vice president of financial research at MF Global, noting the moves weren't a big surprise. Still, he said, the dividend cut represents "a gesture of goodwill and a [public relations] positive. I think the worry might have been to some degree, if they had continued to pay the dividend out and you had a cost issue, that it kind of jeopardized the cash flow of the company. The fact that they cut the dividend, that shores up the idea that they'll be able to service their debt." As for the $20 billion fund, Kalivas said, "the fact that they've put $20 billion into escrow, it's kind of helping the market get its hands around what the company and the government seem to think the liability's going to be. It's removing a little bit of the uncertainty that's been hanging over the stock." Jason Weisberg, senior vice president at Seaport Securities, said investors found BP's agreement with the White House encouraging, adding, "the way Wall Street perceives this is that it's pretty tough to penalize a company when they're going above and beyond what they're legally bound to do." In addition, he said, investors "see this as an end to the financial bleeding," with the $20 billion helping investors get a better idea of what BP's total liabilities might be. Weisberg noted that with BP's plans to capture more than 50,000 barrels a day from the well and crude currently priced above $77 a barrel, the company's financial ability to fund the $20 billion does not appear to be a concern. Weisberg doesn't own BP, but called the stock "a large beacon on my radar." He added that he would buy the stock if it climbs 5% to 10% from here, as "5% to 10% from these levels would indicate to me that people are investing in the stock beyond the short-term trade. That would probably signal a very long-term bullish direction for the stock." BP's bonds also rallied on the news Wednesday afternoon, helped not only by BP's announcements of the dividend cut and escrow fund, but also by a statement on CNBC from Bill Gross, co-investment chief for Pacific Investment Management Co., that his bond-fund firm has recently begun buying one-year bonds issued by BP. Wednesday's announcement from BP came after a meeting with President Barack Obama. Obama called the meeting "constructive" and said BP voluntarily agreed to set aside an additional $100 million for workers who lost their jobs as a result of a deep-water drilling moratorium imposed by Obama. Obama also said the $20 billion is not a cap, and that BP will pay the full costs of the cleanup, including environmental damage. Still, he added, "BP is a strong and viable company and it is in all of our interests that it remain so." Many investors, however, are still wary. Among them is Haag Sherman, chief investment officer at Salient Partners. While Sherman doesn't own BP shares, he said President Obama's Tuesday speech accusing BP of operating with "recklessness" and vowing that the company would pay for the disaster wasn't reassuring. "He is trying to avoid this being his Katrina," Sherman said. "He's playing a fine line here between showing resolve in the form of an environmental crisis while not painting such a draconian picture that multinationals will not want to do business in the U.S." Bond investors are voicing similar concern. "It's an unanalyzable situation," said W. Frank Koster, chief investment officer at Dwight Asset Management, which focuses on fixed-income investments. Koster said he felt fortunate that the firm exited its bond positions in BP and other companies connected with the Deepwater Horizon rig "at the front end of the spill." -By Donna Kardos Yesalavich, Dow Jones Newswires; 212-416-2188; [email protected] (END) Dow Jones Newswires June 16, 2010 15:44 ET (19:44 GMT)