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BP: Cleanup costs for oil spill will be ‘severe’

/ Source: The Associated Press

BP Chief Executive Tony Hayward sought Friday to reassure investors about the fallout of the oil spill, saying the company has "considerable firepower" to cope with costs he acknowledged will be "severe" and long-running.

Hayward and other senior BP PLC executives struck a penitent note in their first comprehensive update to shareholders since the explosion at the Deepwater Horizon rig six weeks ago, stressing their commitment to rebuilding BP's tarnished reputation, improving safety measures and restoring the damaged Gulf coast.

"We will meet our obligations both as a responsible company and also as a necessary step to rebuilding trust in BP as a long term member of the business communities in the U.S. and around the world," said BP Chairman Carl-Henric Svanberg. "This is in the interest of all our stakeholders."

The company, which announced it was creating a stand-alone organization to manage its long-term response once the spill is over, received a warmer response on the audio webcast than it has in many public forums in recent weeks.

There were no overtly hostile questions and no discussion about the shares sell-off in recent weeks that has wiped some $70 billion off the value of the company, or the validity of Hayward's position after a number of gaffes by the CEO — one British-based analyst even congratulated him on his handling of the situation.

Hayward said it was only fair that he take on a lot of the criticism and credited his thick British skin for coping with it.

"It's right that I should be the lightning rod," he said. "I'm so far unscathed."

"Sticks and stones can break my bones, but words can never hurt me, or however the phrase goes," he added.

Shares in the company dropped during the conference call. Investors may have wanted an immediate commitment from BP to pay out planned dividends despite objections from some U.S. lawmakers who argue against handing out billions to shareholders at a time when the complete cost of the oil spill is unknown.

The stock was 3.8 percent lower at $37.78 in morning trading on the New York Stock Exchange.

BP faces a tough balancing act, caught between worried investors and an increasingly angry U.S. government and public. It is a key stock for millions of investors and pension fund savers, with BP accounting for about 6 percent of all the UK equity money held by defined benefit pension schemes. BP's share price also has a major bearing on the wider FTSE 100 Index, accounting for 7 percent of the index.

The company reported Friday that some oil was flowing into a containment system after it cut a pipe and placed a cap over the broken Deepwater Horizon well, but it was too early to tell if the latest attempt would ultimately be successful.

Hayward said he expects containment and cleanup costs to continue at current rates — they have topped $1 billion pounds since the rig explosion that killed 11 workers six weeks ago — until well after the company stops the flow of oil.

If the company succeeds in stopping the flow of oil by August, when BP hopes to have relief wells operational, the company would be able to pay the majority of those costs by the end of this year. Costs arising from potential lawsuits and fines would be on top of that, Hayward said.

He added that the moratorium on new drilling in the Gulf imposed by the U.S. government because of the spill could impact production by 50,000 barrels of oil per day in 2011 and up to 75,000 barrels per day in 2015.

However, he highlighted BP's strong balance sheet, saying the company continued to generate strong cash flows from other operations.

BP earned more than $16 billion last year. It has a generous annual dividend yield of 8.9 percent, compared with 2.8 percent for Exxon Mobil and 6.5 percent for Royal Dutch Shell.

Executives disappointed investors who had hoped for an immediate commitment from the company to pay out planned dividends despite objections from some U.S. lawmakers who argue that it's not right for the company to hand out billions to shareholders at a time when the complete cost of the oil spill is unknown.

Svanberg appeared to take the political ramifications into account, saying that the board "understood the importance" of the dividend to shareholders, while stressing the company's priority was to deal with the oil spill.

He indicated the company would decide on the dividend closer to its next quarterly earnings report on July 27 when it is due to announce its next shareholder dividend. It is scheduled to pay out a previously announced dividend on June 22.

"All factors will be considered and the decision taken in the long term interests of the shareholders," Svanberg said.