What’s new
• $20bn independent claims fund
• Dividend cancelled for three quarters
• Cutting capex and increasing divestments
• Tony Hayward returns to London; Bob Dudley takes over in Gulf
BP last week agreed to set up a $20bn (£13.5bn) claims fund over the next three-and-a-half years, funded by payments of $3bn in the third quarter of 2010, $2bn in the fourth quarter and quarterly payments thereafter of $1.25bn until the $20bn total is reached. The $20bn does not constitute a cap on liabilities, and fines and penalties will be paid separately. BP has also cancelled its previously announced first-quarter dividend and dividends for the second and third quarters, and will further boost cash by cutting capital expenditure and increasing asset sales. Here, leading analysts give their views on the prospects for the shares.
Citi says…
Buy. With net debt around $25bn and estimated gross cash flow in excess of $70bn in the 2011-2012 period, we remain of the opinion that BP is well placed to meet the financial liabilities arising from the Macondo spill and pay dividends.
In the absence of more definition on costs and until the well is finally killed (at least early August), the stock will be buffeted by newsflow. However, given our view of BP's asset base and assessment that even absorbing $40bn of value impact the stock is worth 590p, we remain buyers.
Collins Stewart says…
Buy, but still not one for the fainthearted. With yesterday's announcements on the spill claims account and the dividend, we think two of the key issues are now fully discounted, and we are upgrading the stock on the balance of risk/reward.
We see two positives: 1) BP's payments into the claims fund are phased over such a period as to make them reasonably manageable, and 2) this process may be seen as a necessity if BP is to have a long-term future in the US. It should also give BP a starting base for re-establishing its relationships with key US administrators and with the US population.
Evolution Securities says…
Buy. BP’s package agreed with President Obama should cool the political heat and provide some degree of comfort to equity and bond markets, shareholders and businesses/residents in the Gulf of Mexico affected by the Deepwater Horizon accident.
BP is down 49 per cent on its pre-accident share price implying a loss of around $90bn versus the $20bn claims fund and any fines or penalties. Even if the final cost totals $40bn and BP is liable for 100 per cent, the shares look oversold. We would still be cautious of buying the shares ahead of the intervention wells being completed (August) but keep our target price of 580p.
Charles Stanley says…
Hold. The staged payments by BP into the fund should be reassuring. Also, the dividend decision should be viewed as prudent in the context of the considerable uncertainty surrounding the continuing leaking well and unknown flow rates. BP highlights its strong cash flow of $30bn expected in 2010. The prudent steps it is taking to increase cash resources could actually keep its gearing within the 20-30 per cent range and maintain a good credit rating.
The BP share price has reacted positively to the announcement. However, regaining control of the leaking oil well has proved more difficult than initially thought and estimates relating to the amount of oil leaking have been increased several times.
Macquarie Research says…
Neutral. The estimated $11–29bn net cost to BP includes the cost of relief wells, offshore intervention and onshore cleanup, as well as restitution, fines and penalties. We would want to see evidence that the leak has been substantially reduced before becoming more positive on the stock.
BP is one of the most exposed companies to the deepwater drilling moratorium. The US constitutes a substantial portion of BP's business, and political resistance could serve a blow to the company's aspirations in the region.
