Following a meeting with President Obama on Wednesday, the BP plc board of directors suspended the company’s dividend, agreed to slash spending and said it would sell up to $10 billion of assets over the coming year to fund a $20 billion claims fund and as a $100 million unemployed workers fund related to the Gulf of Mexico (GOM) disaster (see related story).

As a “responsible party arising from the Deepwater Horizon spill,” the board agreed to create the claims fund over the next three and a half years.

Initially, BP is to make payments of $3 billion in the third quarter and $2 billion in the final three months of this year. Those payments would be followed by a payment of $1.25 billion per quarter until a total of $20 billion has been paid.

As the fund is being created, BP agreed to set aside U.S. assets with a value of $20 billion. “The intention is that this level of assets will decline as cash contributions are made to the fund,” the board said.

“The fund will be available to satisfy legitimate claims including natural resource damages and state and local response costs,” said the board. “Fines and penalties will be excluded from the fund and paid separately. Payments from the fund will be made as they are adjudicated, whether by the Independent Claims Facility (ICF)…or by a court, or as agreed by BP.”

The ICF, to be administered by Obama appointee Ken Feinberg, is to adjudicate on all Oil Pollution Act and tort claims, excluding federal and state claims.

Any money remaining in the fund once all “legitimate” claims are resolved and paid would revert to BP.

“The fund does not represent a cap on BP liabilities but will be available to satisfy legitimate claims,” said the board. More terms about the claims fund are to be announced as soon as possible.

“Notwithstanding BP’s strong financial and asset position, the current circumstances require the board to be prudent and it has therefore decided to cancel the previously declared first quarter dividend scheduled for payment on June 21, and that no interim dividends will be declared in respect of the second and third quarters of 2010,” the board stated.

A resumption in the dividend payments would be considered in 2011 when results for the fourth quarter of 2010 are issued, which is the time the board said it expects to have a “clearer picture” of the longer term impact of the GOM tragedy.

Given the “current uncertainty over the extent and timing of costs and liabilities relating to the spill,” the board said it was “right and prudent” to take a conservative financial approach.

“BP’s businesses continue to perform well, with cash flows from operations expected to exceed $30 billion in 2010 at current prices and margins before taking into consideration costs related to the Deepwater Horizon spill.

BP’s “gearing level,” considered its actual cost of doing business, “remains at the bottom of its targeted band of 20-30%. In addition, the company has over $10 billion of committed banking facilities.”

To increase available cash resources, the board said it would “implement a significant reduction in organic capital spending and to increase planned divestments to approximately $10 billion” over the next year.

“We appreciated the constructive meeting conducted by the president and his senior advisers and are confident that the agreement announced today will provide greater comfort to the citizens of the Gulf Coast and greater clarity to BP and its shareholders,” said Chairman Carl-Henric Svanberg. “We welcome the administration’s statements acknowledging that BP is a strong company and that the administration has no interest in undermining the financial stability of BP.

“This agreement is a very significant step in clarifying and confirming our commitment to meet our obligations. We regret the cancellation and suspension of the dividends, but we concluded it was in the best interests of the company and its shareholders.”

CEO Tony Hayward, who has helmed BP’s oil spill response efforts and who also met with the president, said, “From the outset we have said that we fully accepted our obligations as a responsible party. This agreement reaffirms our commitment to do the right thing. The president made it clear and we agree that our top priority is to contain the spill, clean up the oil and mitigate the damage to the Gulf Coast community. We will not rest until the job is done.”

On Tuesday Fitch Ratings cut BP’s credit rating by six notches to “BBB,” which may spook some of the producer’s trading counterparties, according to various reports.

According to a report on Tuesday by Reuters, Bank of America Merrill Lynch (BofA) told its traders to stop entering into new oil trades with BP that extend beyond June 2011.

“The order to the bank’s traders came from a high-level executive and was made Monday,” Reuters reported. “It told traders not to engage in trade with BP for contracts beyond one year from this month. The directive didn’t state a reason for the limit on longer-duration trades with the oil company, which comes as the British oil giant scrambles to stop an oil spill in the U.S. Gulf of Mexico [GOM] for which it could face billions of dollars in economic liability.”

BofA is not considered a major oil trader, and as Reuters pointed out, it’s not one of BP’s main counterparties.

“The majority of those, we hear, are still trading as usual with the firm,” Financial Times (FT) said on Wednesday. “If anything, they’re keen to explore insurance options in the CDS [credit default swap] market to protect their deals, rather than limit trades completely.”

However, a call for more collateral “could be expected in the weeks to come — especially if other ratings agencies follow Fitch’s extreme downgrade with similar moves,” FT reported.

Fitch’s previous downgrade of BP on June 3 was followed with downgrades by Moody’s Investors Service and Standard & Poor’s Ratings Services (see Daily GPI, June 4).

Fitch on Tuesday also downgraded BP’s Macondo well partner Anadarko Petroleum Corp. (25%) to negative because of increasing cost estimates associated with the spill. Fitch has a “BBB-” rating on Anadarko. Late Tuesday Transocean, the operator of the doomed Deepwater Horizon rig, said it rejected attempts by Anadarko to nullify existing contracts in the GOM, following a similar move by Noble Corp.

Analysts at said Wednesday if the BofA action is true, “it would be the first definitive indication that the market doesn’t just think BP has short-term trouble, but that it may not be around until June 2011.”

The analysts at called the situation “ironic for two reasons…

“First, BP is a great example of how the derivatives reform legislation stands to impact not just Wall Street firms, but the various companies they do business with” (see Daily GPI, June 16). “BP had $19.6 billion worth of fuel-hedging derivatives on its balance sheet at the end of the first quarter. Those contracts help it hedge against risks that the price of oil, natural gas or other refined products will go haywire.

“Meanwhile, everything for BP seems to be going haywire, and Bank of America — which may not be its only derivatives broker-dealer, but is probably a major one — is saying that it will no longer offer the firm protection beyond next June…”

An “even more ironic point,” said the analysts, is that the “most vilified type of derivative — credit default swaps — was created in the midst of the last catastrophic oil-leak disaster. JPMorgan Chase came up with the instrument after extending a loan to ExxonMobil in the aftermath of its Exxon Valdez spill in Alaska.”

No one has yet been able to pinpoint the damage to BP’s finances from the GOM leak. However, in a note to clients on Wednesday, BofA said an indication of the costs may be inferred from the current flow rates originating from the Macondo well.

“Based on new scientific analysis from well data, the U.S. authorities now estimate the Macondo well flowrate at 35,000-60,000 b/d (from the previous 12,000-40,000 b/d). Flow rates are the single largest factor in determining the potential cost of the spill and the new estimates are materially higher than the 19,000 b/d midpoint used in our published base case cost estimate of US$28 billion,” which the banking firm published on June 10.

“We estimate that each 10,000 b/d increase in flow rate adds some 10% to our base case estimate,” BofA stated. “As a result, the new flow rate could push cost estimates to US$35-60 billion. Assuming, for example, that BP were to pay 65% of this cost, this could equate to a potential $50-100 per/share economic impact on BP.”

BP Wednesday afternoon was trading at around $32/share.

BP is the largest leaseholder in the U.S. GOM and also the biggest natural gas marketer in North America. In the past three years the U.S. upstream assets have generated up to 28% of BP’s total net income, and the GOM assets have contributed 10% of BP’s output, according to analysts.

Long-time energy industry guru and frequent critic Matthew Simmons also offered his perspective in interview on Bloomberg TV Tuesday. The speed of the oil well flow indicates a leak equal to 120,000 b/d, according to Simmons.

Because the leak is not cased and is “effectively an open hole,” Simmons maintains that BP’s relief wells now being drilled won’t stem the leak. The only possible solution, in his opinion, is a small nuclear explosion that would convert the rock to glass — and possibly wipe out future GOM projects and the viability of current projects.

To punish BP for its mistakes, Simmons believes the federal government “will take all their cash.”

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