(BP dividend cut story updated for BP CEO comments on dividend, BP board plan to create dividend IOU fund)
) -- Things aren't getting any easier for
, with President Obama looking for "ass to kick", and Interior Secretary Ken Salazar saying on Wednesday that he would not guarantee the deep water drilling moratorium would only be six months long. BP shares hit a new 14-year low on Wednesday, too. There were also anonymous reports on Wednesday that the Justice Department, already involved in a criminal investigation related to the BP oil spill, was preparing to take action.
Yet BP is fighting back -- at least, against attacks on its share price -- and on Thursday was among the biggest gainers in the market, as it rushed out a statement after Wednesday's "oil spill flash crash", arguing that the heavy selling in BP shares was unjustified and the embattled oil giant is in fine financial shape.
BP being in great financial shape, as far as BP investors are concerned, may depend on the fate of its hefty dividend payment. When President Obama isn't saying he would fire BP CEO Tony Hayward, he has been using the don't "nickel and dime" the Gulf Coast rhetoric as a way to put pressure on BP to suspend its dividend. The attacks on BP's failure to pay damage claims in a timely fashion have been a major political pressure point this week, and by late Wednesday, U.K. Prime Minister David Cameron was even being urged by British business interests to defend one of Britain's largest companies.
The latest round in the fight over the BP dividend came on Friday morning, after Hayward gave the company's first press comments on the issue, telling the
Wall Street Journal
, "We are considering all options on the dividend. But no decision has been made."
Hayward's comment was vague, yet the British press and the
reported that BP is looking into the option of creating a dividend escrow account, more or less an IOU for shareholders. The move would allow BP to suspend the dividend, without having to cut it, and to satisfy shareholders with a promise to deliver the dividend at a later date. The BP board is apparently meeting on the issue this month. According to reports in the U.K. media, the company's directors see little option but to find the least painful way to bow to political pressure from the U.S. government on dividend payments.
The White House said Thursday it had no plans to block the BP dividend, but promised to keep the pressure on. In fact, the White House may have no legal means of blocking the dividend. The message was different from Capitol Hill, with House Speaker Nancy Pelosi (D-Calif.) saying small business claims for damages in the Gulf coast region should come before the dividend, and Representative Ed Markey (D-Mass.), a primary Capitol Hill thorn in the side of BP, indicating the government would block the dividend, if necessary.
If any event related to the BP oil spill crisis might cost Hayward his job, it could be a suspension of his company's hefty shareholder payout.
Notably, the last BP CEO to last cut the oil giant's dividend, Bob Horton in 1992, was forced out of the BP corner office.
noted in a recent article that BP CEO Hayward refused to cut the dividend even during the worst moments of the financial crisis, and even when oil was under $40 a barrel. Hayward made a seemingly innocent quip to investors in 2008 that now has unexpected implications, when the BP CEO said, "I pay taxes, so I don't go to jail. I pay dividends, so I don't get fired."
Questions about the dividend -- will BP or won't BP keep paying it, facing financial strain and even greater political pressure to suspend the shareholder incentive -- led the oil giant into damage control effort aimed at investors and analysts: last Friday's highly anticipated conference call led by BP CEO Tony Hayward and BP chairman Carl-Henric Svandberg, followed by Thursday morning's statement about its share price.
The BP market cap was below book value by Wednesday and its market cap down more than 50% since the oil spill began. In its Thursday statement though, BP noted that it "faces this situation as a strong company," with cash inflows and outflows balanced at an oil price of just $60 a barrel before the incident, which generates additional cash flow with oil prices now well above the $60 mark. BP also pointed to its global asset base as another sign of its strength, a point also made on last week's conference call with investors.
"All of the above gives us significant capacity and flexibility in dealing with the cost of responding to the incident, the environmental remediation and the payment of legitimate claims," BP said on Thursday morning as its shares rebounded.
Critical questions about BP have intensified since failure of the "top kill" and the recognition from BP that its best effort for the next several months will be to contain, rather than stop, the oil spill in the Gulf of Mexico.
Is BP a takeover target? Will BP be forced to sell off prized assets like its stake in Prudhoe Bay, Alaska? There has been no end to the questions about the financial strain on the BP balance sheet -- and the potential repercussions.
In a market signal that many fear the worst -- BP will not survive as a company -- by June 8, credit default swaps protecting against the potential default of BP bonds had spiked to three times higher than their levels at the end of May. BP bonds were trading with the "junk" designation by Wednesday.
The total cost of oil spill to BP had reached above $1.4 billion by Wednesday, excluding the $360 million placed in escrow by BP to fund the creation of artificial barrier islands off the coast of Louisiana, after the federal government approved a controversial plan championed by Louisiana Governor Bobby Jindal..
Even though BP CEO Hayward has few friends in the U.S. or in Washington D.C. specifically, the
reported on Wednesday that BP shareholders still have his back, and would prefer to see BP Chairman Carl-Henric Svanberg placed on the sacrificial altar.
The federal government sent its first bill to BP last Thursday -- a $69 million tab for expenses that Uncle Sam has run up in its oil spill assistance to BP.
BP announced on Tuesday it will pay out its last "non-controversial" dividend to shareholders of record in the first quarter on June 21, to a total tune of just over $2.6 billion. The dividend payout for the first quarter is twice the amount BP has paid so far in its effort to contain and cleanup the oil spill in the Gulf of Mexico.
BP originally announced the first-quarter dividend -- 84 cents for holders of BP ADS shares -- on April 27, only one week after the BP oil leak began.
BP has paid out more than $10 billion in the past two years in dividends and is projected to pay $10.5 billion in dividend payments in 2010.
The BP dividend yield has edged higher as the problems 5,000 feet below the surface of the Gulf of Mexico have brought down BP's market value by $80 billion, as of Thursday. The BP dividend yield has been hovering near double-digits.
BP continues to claim its biggest success yet with the cap, capturing as much as 73,000 barrels of oil by Thursday, with a constant daily rate of roughly 15,000 barrels. Yet with the images of oil gushing out of the underwater well still being captured by the live video feed, the daily updates on the oil siphoned off to the surface has not surfaced as a game-changer for BP.
Credit Suisse got a little ahead of itself in a research note released on Monday arguing that with the success of the cap, BP may have turned the corner in its oil-spill effort. But it sure didn't seem like it, and still doesn't. On Monday, set against Credit Suisse optimism, Goldman Sachs downgraded BP, and the
New York Times
joined the chorus of doom saying that Wall Street bankers were preparing for a BP bankruptcy and potential firesale of the once proud oil company.
The latest market call on the fate of the BP dividend came from Societe Generale analysts on Wednesday, who predicted a 50% chance that BP will suspend its upcoming July 27 dividend. "This is no longer a question of the strength of its balance sheet (which we think is strong enough) but of whether BP will be able to take the situation under sufficient control by the time it has to decide on the dividend...to come up with a story palatable for U.S. politicians and public opinion," the SocGen analysts wrote.
"We don't believe BP has a funding issue, but given the overwhelmingly hostile nature of the U.S. government the company may decide to suspend payments until the wells are capped and the clean-up sufficiently advanced to convince the U.S. that it can afford all the costs as well as pay dividends," an analyst at Evolution Securities, Richard Griffith, recently told
The Associated Press
Without a good estimate for the total amount of oil leaking from the BP well, the amount of oil being captured by the BP cap remains open to debate, as far as judging its "success." In fact, critics now contend BP may have increased the oil flow by as much as 7 times the previous flow level by cutting the deep sea well's riser pipe in the cap operation. Even with the BP progress siphoning off oil to the surface, the Street and investors are not rushing into BP shares.
Goldman Sachs and Argus Research put out reports on Monday reflecting the extreme caution that many analysts and investors feel toward shares of BP, even after one-third of the company's market cap has been erased. Goldman dropped BP to a hold from a buy on Monday morning, saying that BP shares no longer represented any material upside to the larger energy sector due to the potential liability from the oil spill.
Argus Research analyst Phil Weiss put out a research note saying that even though the huge drop in BP's value might make it seem like a good short-term opportunity, there are too many uncertainties related to the oil spill to make any price target "buy" warranted at this time. On the dividend, the Argus analyst said he expects BP to cut its dividend -- even though it could financially support the dividend at its current level -- as a bow to political pressure.
One of the biggest fears about a dividend cut from BP is that institutional investors that have been depending on BP as an income component within income-generating funds will shed the investment if the dividend is cut significantly.
Many pension funds in the U.K. rely on the hefty BP dividend, which in 2009 equaled 14% of total shareholder payout from the FTSE 100 index, according to a report in the
Wall Street Journal
The dividend question was a big one on the mind of investors and analysts on the Friday-morning conference call with BP brass. BP's words on the dividend question, though, seemed non-committal. BP Chairman Carl-Henric Svandberg said on the call that decisions on dividends are made based on circumstances around the time of the pre-scheduled dividend announcement -- in BP's case, July 27.
Join the Rebrand BP Logo Contest
The Street response showed that BP's dividend response was open to interpretation. Some read the comments from the BP Chairman Carl-Henric Svandberg as a sign that BP was not planning to cut the dividend, while other analysts and investors came away saying the BP Chairman's vague response meant he was leaving the door open to a dividend cut.
The dividend response for BP wasn't quite as bumbling as its efforts to contain the oil spill, but it didn't seem to contain investor fears that a dividend cut is coming either.
U.S. senators were actually out ahead of President Obama in saying that it is more or less unconscionable for companies like BP and
to pay out hefty dividends to investors while the oil spill wreaks havoc on the Gulf Coast economy.
Oppenheimer & Co. analyst Fadel Gheit, not one known to mince words, called the federal government's attacks on the BP dividend an ill-advised, and unenforceable, demand.
The BP chairman played the boiler-plate-language, corporate-governance game by saying that a decision on the dividend was part of a regular review process carried out by management. However, not one single statement by BP on the Friday conference call or this Thursday answered the dividend question.
And that's the question on the mind of many investors, so now we ask
investor audience, which is always looking for dividend opportunities in the market:
Will BP cut its dividend?
Take our poll below to see what
has to say -- and if you yourself have something say, don't be afraid to leave a comment. Because don't we all have something to say about the BP oil spill?
-- Reported by Eric Rosenbaum in New York.
Follow TheStreet.com on
and become a fan on
Copyright 2009 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.