Will Gulf oil spill cleanup suffer if BP makes dividend payments?
President Obama wants BP to set aside more money for its Gulf oil spill liabilities. Rising estimates of cleanup costs are putting financial pressure on the firm.
It's crunch week for BP and President Obama.
The oil company's board of directors was meeting on Monday to consider a possible suspension of shareholder dividends – a move that would increase BP's funds on hand to pay Gulf oil spill cleanup costs and damage claims.
But the move hinges on politics more than on the firm's financial outlook, many analysts say.
The president and members of Congress have been pressuring BP on several fronts: to do better at mopping up oil slicks, to create an escrow fund to cover spill costs, and to stop paying dividends to ensure adequate funding of the cleanup. With a visit to the Gulf of Mexico shoreline on Monday, an address to the nation Tuesday, and a meeting with BP officials scheduled for Wednesday, Mr. Obama is renewing efforts to exhibit leadership during the crisis.
That means it's a sensitive moment for BP.
The political pressure on the firm is enormous. The board and chief executive Tony Hayward know the firm must appear prepared to face its liabilities and also responsive to appeals from top US leaders. An announcement by BP on the dividend could come after board chairman Carl-Henric Svanberg meets Obama Wednesday.
Not an 'either-or' situation
Yet a number of oil industry analysts estimate that BP can afford both its dividends and the cleanup costs. The rationale is that BP has huge cash flow from its global energy businesses, and the oil-spill costs will probably come due over the course of several years, not all at once.
"From a strictly financial standpoint we believe the current dividend can be maintained, but with politics entering the picture, the calculation becomes a tougher one," analysts at Raymond James wrote in a recent report for investors.
Already, in a conference call with investors, BP officials have said that “all factors will be considered," not just the desire of shareholders to see the dividend maintained.
BP has options other than either maintaining the dividend as-is or temporarily scrapping it. The company could reduce the dividend’s size, pay out additional stock shares instead of cash, or put the money in a fund, from which dividends would be paid later if the money is not needed for cleanup.
Oil companies' steady stream of dividend income is valued by millions of retirees. In Britain, in particular, about $1 in every $8 of dividend income from Britain's FTSE 100 stock index comes from BP. (US shareholders, too, are reaping $4 billion a year in BP payouts, by one estimate.)
The dividend pressure from Obama and Congress has become a source of London-Washington tension.
A dividend cut could push down BP's already-battered share price, as investors wonder when dividends will come back – and perhaps even whether their suspension signals deeper long-term trouble as the firm wrestles with the oil-spill fallout.
Some oil industry analysts have already wondered aloud about whether BP could be forced into bankruptcy or become a takeover target, although many say the firm is financially strong enough to weather the crisis.
Mounting financial pressures
Still, politics isn't the only reason for BP to be evaluating its dividend policy.
Even from a strictly financial analysis, the rising costs of the spill mean that "dividend risks are clearly rising," according to a recent report by analysts at Credit Suisse. Translation: The firm can afford to keep its dividend in place for now, but it won't necessarily be easy for the firm to balance the cleanup costs, investments in new production, and its level of debt.
The spill could cost BP nearly $40 billion, Credit Suisse estimated, with perhaps $14 billion in damage claims and $23 billion in cleanup. "This would absorb three years of BP's free cashflow" after paying for dividends and for capital spending on new production, the report said.
That's a lot of money – and it's not clear what the final tally will really be. For now, BP has spent $1.6 billion on the Gulf crisis since the April 20 rig explosion. The ultimate tab will hinge on a range of factors, which could pin it above or below that $40 billion forecast.