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Plugging BP's leak

FEATURE: The dividend cut at BP is a huge blow to investors. We look at what to do
June 17, 2010 & John Hughman

BP is now under unprecedented public and political pressure in the US. President Obama has accused it of “recklessness” and forced it to set up an independently managed escrow fund for remediation of the damage. Company executives met the president on Wednesday, fresh from a grilling from hostile Congressmen on Tuesday, and also yielded to pressure to suspend dividend payments to shareholders.

Meanwhile, the ruptured Macondo well has now spewed hundreds of thousands, if not millions, of barrels of oil into the Gulf of Mexico and wiped over 47 per cent from the oil giant’s market value since the rig that was drilling it, the Deepwater Horizon, exploded on 20 April.

BP says the “lower marine riser package” is collecting around 15,000 barrels of oil per day (bopd), together with 32.9m cubic feet of gas (equivalent to about another 5,500 barrels of oil) each day. But estimates of the flow rate from the well head have now increased to 35,000-60,000 bopd.

The best hope of stemming the flow remains the two relief wells designed to intercept and permanently seal the damaged well, although there’s also no guarantee that these will work first time. Hitting an object the size of a dinner plate under four miles of water and rock may require several attempts. It could take a year to fully plug the well, according to one analyst.

Although the immediate challenge is stemming the flow of oil, the longer-term impact on BP is likely to be significant. Its credit rating has been slashed, raising the cost of its borrowing. Its brand name has been tarnished. The costs of remediation and compensation will reduce the amount it can invest in operations, reducing its future growth. Until the compensation fund was agreed, analysts were openly discussing bankruptcy as a possible outcome.

But it's the suspension of the dividend that will have the most tangible impact. BP accounted for a sizeable chunk of UK blue-chip dividends. it's a core holding in many equity income funds – and in private investor' portfolios. The reduction in its market value has already put a big dent in many people’s wealth and the suspension of the dividend will do yet more damage.

This week, we look at high-yielding alternatives, and name the income funds that have escaped the woe by reducing or eliminating their BP positions. We also consider whether you should sell the company’s shares now, or hang on for a recovery that could be a long time coming.