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Why BP Made Concessions

In addition to the dividend cut, BP announced that it's setting up a $20 billion escrow account to be administered by an independent agency, and into which BP will make cash injections. BP is also creating a $100 million fund to pay claims by oil workers who lost jobs as a result of the federal ban on drilling in the Gulf of Mexico.

Some analysts were out with comments by Thursday morning that would seem to bolster the BP case. Bond rating firm CreditInsights said that the BP financial plans shows that President Obama does not have his finger on the "Make BP Go Bankrupt" button. BP shares rallied after Wednesday's announcement and were up again in pre-market trading and in London.

Yet just as quickly as BP breathed a sign of relief, though, Raymond James came out with a report estimating BP's legal liability alone at over $62 billion, and The New York Times ran a headline saying that the potential for criminal charges against BP could make $20 billion seem like chump change.

The text of Hayward's opening statement was released on Thursday and includes a long mea culpa from the BP CEO to the people of the Gulf region. Though it's unlikely that Congress will let Hayward off the hook for finally stepping up with extended words of remorse.

In the Wednesday announcement of financial concessions, BP also said it plans to pursue asset sales from within its global portfolio that could raise as much as $10 billion.

On Thursday, CNBC reported that BP is considering a debt sale of $5 billion to $10 billion, by as early as next week. BP has previously said that it is currently at the low end of a net debt ratio it wants to keep between 20% and 30%, so it has the flexibility to take on more debt.

On Wednesday's conference call with investors, BP CFO Byron Grote was asked if BP had any financing plans in the works tied to the cash commitments due the escrow fund. The BP CFO said the only financing plan that BP had at present was the agreement to make cash injections into the escrow fund. "External financing we do when appropriate, but there is nothing tied to the escrow fund explicitly in any form," Grote said.

BP bonds rallied on Wednesday and Thursday as a result of the financial concessions made after the White House meeting, with yield spreads narrowing.

BP is discussing the offering with five banks, including Goldman Sachs (GS) and Morgan Stanley (MS), CNBC reported, though the banks had no immediate comment.

As a result of the decisions made on Wednesday and the slowdown in the Gulf of Mexico due to the federal ban on drilling, BP said its capital expenditures will decline by as much as 10% in 2010, and 10% or more in 2011. Cuts in organic capex of 10%, or slightly higher in 2011, are based on the company's previous guidance of $18 billion in capital expenditures, Grote said.

If it seemed BP had walked into the White House not being legally bound to suspend its dividend or create an escrow fund, it seemed to some analysts that BP walked out of White House with the legal nature of the government's demands not being a very big issue anymore -- or one on which BP thought it wise to take much of a stand.

John Rigby, analyst at UBS, said to Grote on the call, "It seems to me that BP agreed to pay $20 billion into escrow and suspended the dividend for three quarters, yet the BP chairman described the meeting as being constructive. So what did you get out of the meeting, from what appears to not be a legal requirement and something people thought was an aggressive stance taken by the U.S. government?"
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