There’s been a mixed reaction from City analysts to BP’s decision to halt dividend payments for the rest of the year and pay $20bn into a Gulf of Mexico claims fund.
House broker UBS is hopeful that BP will now be able to normalise its relationship with the White House (emphasis ours throughout):
While BP should expect a significant penalty as a result of its Macondo spill these events have no precedent. In order to try to protect its large US business BP has accepted fairly draconian measures that have little legal enforceability but, we hope, lay the foundations for normalising its relationship with Washington.
While the pressure from Washington has been disastrous for the shares, so in recent days has the self-reinforcing spiral of equity and debt values. Measures to liquidate assets, reduce capex and significantly reduce debt should address these issues and while this impacts growth and multiple we think it should secure value.
While Citigroup says BP has taken a pragmatic decision and the creation of the Independent Claims Fund (ICF) should help calm nerves:
While BP has ceded some control of how claims are administered, at least now we have a short-term path to how financial obligations may be met. Against this year’s forecast $32bn of cashflow, the escrow payments of $5bn and capex of $18bn should be easily accommodated. Financially, the escrow payment of $6bn next year should not impair BP’s ability to reinstitute the dividend – our forecast is for operating cashflow >$40bn in 2011 and free cashflow post capex of $22bn. However, that decision will be taken in the light of how events in the Gulf unfold and may still be politically charged by Q1 next year.
But adds:
Nothing we have learnt today has put more definition around how much the spill will eventually cost BP and our assessment of a cost to shareholders of $40bn and price target of 590p remains intact. In the short term, confirmation that no dividend income will be forthcoming for the rest of the year will reduce BP’s attractions for some shareholders and until we get more definition on costs and damages the stock will continue to react to newsflow.
Evolution Securities reckons the fund is a line in the sand – of sorts.
BP’s package agreed with President Obama to set up a US$20bn claims fund draws a line in the sand (of sorts). It doesn’t cap BP’s liabilities nor cover fines and penalties but does clarify how BP will settle legitimate claims and clean up costs. However, it does come at the expense of the 1Q (due 21 June), 2Q and 3Q dividend payments.
BP is now down 49% on the pre-accident share price implying a loss in value of cUS$90bn vs. the claims fund of US$20bn and any fines or penalties. Even if the final cost totals US$40bn and BP is proven liable for 100% the shares look oversold, We would still be cautious of buying the shares ahead of the intervention wells being completed in August but maintain our view that BP is a long term Buying opportunity and keep our target price of 580p.
However, BoA Merrill Lynch is not impressed. It says the outcome of the meeting with the Obama offers little comfort or clarity. Indeed, the bank has removed BP from its Europe 1 list:
We believe that the measures taken (US$20bn escrow with no cap and excluding penalties; dividend cut with cancellation of announced 1Q dividend, capex cut and asset disposals) will materially erode BP’s competitive advantage versus peers for the foreseeable future. As counterparty risk grows, as implied by the CDS market, BP’s trading operations – historically a material income source – could also be handicapped. Based on lower upstream growth expectations, lower trading revenues and higher costs, we cut our 2010-12 EPS by 6%; assume no dividend in FY10 and lower our 2011 dividend. With the potential recovery now set to take well beyond our 12 month investment horizon and with real risk that there will be no resumption in the dividend in FY10/1Q11, we downgrade BP to Neutral (400p PO).
Morgan Stanley reckons the announcement should be welcomed by long-term shareholders as it provides the first light at the end of the tunnel.
But in the near term it creates uncertainties, especially with regard to UK income funds, it warns:
Suspending the dividend and creating a claims fund should alleviate what was significant pressure from the US Administration. We acknowledge near-term uncertainties remain. These include
1) what selling pressure there may be from UK income funds (c.20% of the shareholder base on MSe). In particular, the removal of the Q1 dividend payment next week (rather than the H2 suspension) may come as an unwanted surprise.
2) The extent of the spill (and therefore the clean-up cost) appears to grow with flow-rates now estimated between 35-60kb/d.
3) The timing and probability of success from the relief wells.
4) The findings from the senate hearings and investigations – we note Tony Hayward is scheduled to appear before a senate sub-committee today.
And traders reckon this point, from a recent Collins Stewart note, is also worth considering:
US selling pressure: we think the high volume of US selling of BP reflects the liquidation of positions held by US institutions unwilling to be seen to be maintaining big positions in the stock, particularly ahead of end-June quarterly reporting to investors. We would expect this heavy selling to ease off after the end of June, which could ease the pressure on BP’s stock.
And the broker is telling clients this morning, don’t expect the dividend to return to its old level.
We think many investors had assumed the 1Q dividend was secure, and were focusing more on risks to the 2Q payment but nevertheless, expectations of a cut had become much more widespread in recent days. BP will consider resuming dividends at the time of its 4Q results early in 2011. We are not convinced that dividends will revert to previous levels of $0.14/share/qtr. A payment of half this amount (which is now in our forecast) would give a quarterly cash outflow – combined with contributions to the spill fund – equivalent to that from the previous level of dividends, and imply a prospective yield of 5.4%.
So a rebased dividend when, and if, it returns.
Taking a longer term view, Matrix reckons the Macando well will change the E&P landscape:
We think that the issues raised by the Macondo well for the E&P sector are real and over the next few years are likely to have a growing impact on costs, regulatory requirements, and company strategies. Many of the potential impacts are interwoven and even conflicting and so the changing E&P landscape is likely to be the result of complex actions and reactions. Crucially, though, where, how, and with whom E&Ps participate, is likely to change. The ripples have only just begun.
At pixel time there was no signs of the rally/dead cat bounce in BP abating – they were trading 27.35p higher at 364p. Meanwhile the BP CDS, which blew out to absurd levels on Wednesday, was trading at 450bp, 96 points tighter, according to Markit.
Related links:
As the execs turn themselves in, BP turns itself over… – FT Alphaville
Who’s not trading with BP? – FT Alphaville
BP has nothing to fear… – FT Alphaville
BP short interest, other facts and stuff – FT Alphaville