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As spill costs mount, BP shares tumble anew

BP shares sunk Thursday in London as U.S. politicians pressed the British oil company to halt its dividend payments and fork out greater compensation for American workers.
/ Source: news services

BP shares sank in London to their lowest levels in 13 years as U.S. lawmakers pressed the British oil company to halt its dividend payments and fork out more compensation for damage caused by the massive Gulf of Mexico oil spill.

BP shares dropped as much as 11 percent in London before recovering some ground by early afternoon, trading 5.1 percent lower at 371.40 pence ($5.42). In the United States, the stock bounced back as some analysts said Wednesday's 15.8 percent selloff was an overreaction.

Still, the steady decline in the company's share price has fallen nearly 50 percent since the spill began with an April 20 rig explosion in the Gulf, wiping out nearly $90 billion in market value.

BP is finding itself caught in a trans-Atlantic squeeze between angry U.S. government officials and unhappy shareholders, including hundreds of thousands of retirees who own the shares through British pension funds.

Prime Minister David Cameron's office said the British leader would discuss the issue with President Barack Obama on a scheduled telephone call over the weekend.

Investors are fretting about the rising costs facing BP after Obama suggested it should also pay unemployment benefits to thousands of oil workers laid off during a moratorium on deep-sea drilling triggered by the spill.

Strong financial position
BP tried to reassure investors before the London Stock Exchange opened, saying it was in a strong financial position and it saw no reason to justify the U.S. sell-off, and many analysts agree that the company can withstand the crisis.

But most market experts also acknowledge that the political rhetoric surrounding the accident is outweighing financial fundamentals.

BP is scheduled to pay shareholders $2.63 billion in quarterly dividends June 21, causing outrage among some U.S. lawmakers, who have urged CEO Tony Hayward to halt the payment, which was announced April 27.

While that appears unlikely, Evolution Securities analyst  Richard Griffith said BP may halt future dividend payouts "until the wells are capped and the clean-up (is) sufficiently advanced to convince the US that it can afford all the costs as well as pay dividends."

"Unilateral action against BP over its U.S. operations, be it unreasonable or illegal, hangs over BP," he said.

But he and other analysts emphasized that BP has no serious financial issues, even though it said Thursday the cost of the cleanup and containment efforts had now hit $1.43 billion.

BP had $6.8 billion in cash on its balance sheet at last report and generated $16.6 billion in profits in 2009.

Robert Talbut, chief investment officer at Royal London Asset Management, a shareholder in BP, said "there is a lot of very irrational and short-term selling going on." But he added that talk of a potential sale of assets or takeover bid — PetroChina Ltd. has been suggested by some as a potential suitor — was not surprising.

"I can understand exactly why someone else would want to buy the BP assets because I think they are grossly undervalued at the moment," he said. "As a shareholder, it's not something I would welcome."

'Anti-British rhetoric'?
The politics of the spill crossed the Atlantic, with London Mayor Boris Johnson expressing concern Thursday about the "anti-British rhetoric that seems to be permeating from America."

Johnson said BP was paying a "very, very heavy price" for an accident.

"I would like to see a bit of cool heads rather than endlessly buck-passing and name-calling," Johnson told BBC Radio. "When you consider the huge exposure of British pension funds to BP, it starts to become a matter of national concern if a great British company is being continually beaten up on the airwaves."

The influential Financial Times newspaper ran a banner front-page headline "UK alarm over attack on BP."

Suspending or cutting the dividend would have a big impact in Britain, where the company accounts for about an eighth of dividend payments from companies in that country's blue-chip stock index, providing crucial income for retirees. In addition, about 40 percent of BP's shareholders are based in the U.S.

BP stressed on Thursday that it had "significant capacity and flexibility" to deal with ongoing costs, underlining its cash flow, strong debt to equity ratio and proven reserves.

The company reminded investors that it had indicated in March — before the explosion at the Deepwater Horizon rig — that its cash inflows and outflows were balanced at an oil price of around $60 per barrel. Oil currently sells for about $76 a barrel.

Killik & Co. analyst Jonathan Jackson said BP shares would remain very volatile until there was a clearer idea of the potential cost but he remained positive on the stock.

"Despite the high risk involved in adding to holdings in the short term and the possibility of a temporary suspension of the dividend, we would continue to do so," he said.

U.S. 'planning to take action'
A senior U.S. Justice Department official said after the markets closed that the department was "planning to take action'' to ensure BP had enough money on hand to cover spill damages.

Robert Stark, a bankruptcy attorney with Brown Rudnick in New York, said he expected BP to be running models right now to determine how they would pay their liability claims.

"It's a very big company with a very big balance sheet ... in the pure economic world of bankruptcy, do they have enough money to pay their debts? I don't think any of us know that for a fact. At least in the short term they have capability to pay,'' he said.