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Why BP Made Concessions

Stocks in this article: BP RIG APC

Grote's response to Rigby involved both the political reality of the oil spill situation and the financial threat to BP of a situation that seemed to be worsening on a daily basis. "We believe we got the opportunity for the first time to have a constructive dialogue with the President. As the frustration has grown with the inability to cap the flow, there has been increasing concern about how BP was going to fulfill its obligations to all of those affected by incident, and the rhetoric has had some fairly dramatic affects on BP, both debt and equity markets observable for one and all."

Grote continued, "Much of the reaction was caused by deep uncertainty of how issues would be resolved. ... To have the chance for the chairman and CEO to sit down with the President and carve out an agreement that provides greater comfort and clarity and a framework consistent with the intention BP has had all along, allows our business to progress effectively," Grote said.

Specifically, the BP CFO said that being allowed to stage injections into the escrow account, "I hope provides greater comfort to debt and equity markets that there is not a very large and significant impact on BP coming in the immediate time frame."

The cash injections into the escrow account will be $5 billion per year over the next four years -- $3 billion in the third quarter 2010, $2 billion in the fourth quarter, and then $1.25 billion per quarter after that.

As for asset sales to be made by BP, Grote said that BP was exploring a range of non-core assets that are not strategic to its longer-term success, primarily from its upstream asset base. Grote also noted the potential to spin off U.S. assets and derive an independent valuation.

The BP CFO said that the 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.

In all, BP is looking at the moves creating a $2 billion decrease in capital spending, $7 billion to $8 billion in dividends not paid, and another $7 billion to $8 billion from asset sales, for a total of $16 billion to $18 billion incrementally gained in cash. That is against the $5 billion already in planned injections into the escrow fund in 2010, giving BP a much larger cash balance than some investors and analyst thought it needed to get through the oil spill crisis.

BP expects $30 billion in cash flow from operations in 2010.

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