BP Bends so as Not to Break

BP has agreed to set aside $20 billion to compensate victims of the oil spill and to suspend dividend payments for the first three trimesters of the year. For the petroleum company, it’s an issue of survival.

BP has finally accepted the drastic conditions that the White House has requested. The petroleum company will put aside a fund of $20 billion to compensate the victims of the oil spill in the Gulf of Mexico. The sum will be collected over four years, with $5 billion before the end of the year, followed by $5 billion per year after that.

Furthermore, and it’s a gesture with many weighty consequences, BP will not pay out dividends this year. The business is cancelling the dividend announced for the first trimester, which was supposed to be paid at the end of the month. Nor will it pay at the second and third trimesters, and it is considering making one payment for the fourth trimester, with an installment in 2011. The gesture is important, given that the pension fund was very fond of BP’s actions because of its almost-guaranteed dividend payment.

The sum of $20 billion is not the limit of what the total cost of the oil spill will be. It does not include the fine that BP will receive ($1,100 per spilled barrel, multiplied by several million barrels). But it enables two essential things. …

First, it gives a certain visibility to shareholders. The final toll of the oil spill is still unknown, but today the shareholders can get a clear idea of the state of BP’s finances. The vertiginous fall of the stock exchange should level out.

Next, this announcement should calm political anger. The White House has accepted the deal and should limit its anti-BP rhetoric. It is clearly no longer in Washington’s interest to “break” BP (and it never was, notably because BP is a major supplier for the Pentagon).

Thus, BP bends, but the business is not breaking. In fact, it can easily cope financially. Its cash flow this year should be $30 billion. Furthermore, it has $10 billion in loans from banks, from which it can draw at will. BP has announced also that it will reduce its investment expenses and finally, that it will accelerate the sale of its assets in order to free up $10 billion during the 12 months to come.

The medicine is bitter to swallow (from a purely financial point of view; the enormous environmental damage is not in question here). But the business will recover — on condition, however — that the oil spill does not last forever. According to Barack Obama, 90 percent of the leak should be controlled within the “coming days or weeks.” As he says: “Now, that’s not good enough.” The emergency oil wells will be completed only in August … if everything goes well. The quantity of petrol still leaking continues to weaken BP. The petroleum company must urgently put a stop to it.