BP -- Soon to become a Dividend Play

The media hysteria over the Gulf of Mexico oil leak led to shrieks and wails about extraordinary damages and overwhelming clean-up costs. However, with the leak sealed and most of the oil already removed from the water, it's clear the costs of the episode will drop well below $20 billion. All the affected businesses will resume relatively normal operations more quickly than expected. Interestingly, with an end to the clean-up, many boat operators will see their incomes drop. One of the ironies of the oil leak is this: the pay for removing oil was higher than the pay most operators were earning from fishing and their other maritime enterprises.

BP Tells Analysts Spill Claims May Be Lower Than $20 Billion

Sep 13, 2010 7:29 AM ET

BP Plc, responsible for the largest oil spill in U.S. history, told analysts that legal claims may be lower than the $20 billion it is setting aside for victims of the Gulf of Mexico disaster.

Robert Dudley, who takes over as chief executive officer from Tony Hayward on Oct. 1, said that the $32 billion provision for the spill is still the most reasonable estimate of the total cost, according to Mark C. Fletcher, an analyst at Citigroup Inc. who attended the meeting with Dudley last week.

Dudley said that given current estimates of claims the $20 billion Independent Claim Fund probably exceeds calls, Fletcher wrote in an e-mailed note today. Dudley also told analysts that state claims, which aren’t included in the fund, shouldn’t be too high, Fletcher said.

BP may resume paying dividends for the fourth quarter of this year after canceling three quarters of payouts to shareholders to free up funds for the spill, though they won’t be as much as before the incident, according to Fletcher. Dudley said July 27 that the company won’t “rush back into the same dividend philosophy” and didn’t indicate whether the company would make a payout for the fourth quarter of 2010.

Toby Odone, a spokesman for BP, said he couldn’t confirm Dudley’s statements. BP executives regularly meet with investors throughout the year, Odone said.

The company may wait until the first quarter to resume dividends, Sanford C. Bernstein & Co. said today in a separate note. BP will also need to complete the sale of as much as $30 billion of assets over the next 18 months to start making payouts, Bernstein said.

“BP’s cashflow position should be just strong enough to support restoration of dividends by the first quarter of 2011, under an $80 a barrel oil price scenario based on estimates,” analysts Oswald Clint and Iain Pyle wrote. “This assumes divestments are completed and the spill costs do not climb much above BP’s $32.2 billion estimate.”

BP is unlikely to sell more assets than announced or break up the company, Bernstein said. The analysts rate BP “market perform,” though production growth will probably lag behind peers Royal Dutch Shell Plc and Total SA, according to the note.

BP -- Strong Buy

Surprise, surprise, the oil that had been gushing into the Gulf of Mexico seems to have disappeared. According to the experts, a combination of human and natural forces have led to its near disappearance.

When the leak sprung, BP piped in special dispersant chemicals into the flow. Apparently they have worked as advertised. Second, the oil that rose to the surface of the Gulf was further dissolved by the combination of warm water and hot sun. After clean-up efforts got underway, a lot of oil was skimmed off the surface of the water. Meanwhile, the water currents in the Gulf have carried much of the oil out to the Atlantic Ocean.

Some oil reached shore areas. But able-bodied citizens were there and waiting, scooping up every blob that hit land.

Thus the question of damages needs a major revision. It looks like the immediate damage to the water and shore is close to ZERO. The harsh dispersant chemicals and the oil itself may have harmed or killed some sea life. But the new question is how long will it take for the effects of the chemicals to dissipate?

When can fishermen, crabbers and oystermen resume their work?

Hard to say. But, it's now clear the total cost of the clean-up and compensating the fishermen and resort owners will fall far below the figure of $20 billion concocted by hysterics claiming the oil leak was Doomsday for the Gulf.

What's ahead for BP?

The company will make good on its obligations to pay for the clean up and maintaining the income of the people hurt by the interruption to their livelihoods. After the company and the injured parties settle on a figure, the company will restart its dividend. It's important to remember that BP stock is the Widows and Orphans stock of Great Britain. A lot of people and mutual funds expect to collect hefty dividends from this stalwart organization.

When the dividend is reinstated, the stock will rise. If oil stays around its current price, the company will continue to enjoy enormous cash flow, which suggests the stock price will return to its pre-leak levels -- $60.