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Wednesday, June 16, 2010

BP WATCH: BP's US Shares Close Higher On Dividend Cut, $20B Fund

BP PLC's (BP, BP.LN) American depositary shares rose Wednesday after the oil giant said it won't issue further dividends this year and confirmed an agreement to set aside $20 billion to help pay for claims as a result of the Gulf oil disaster.

BP's U.S. shares closed with a gain of 45 cents, or 1.4%, to 31.85. News of the dividend cut and the escrow fund helped bring some clarity to investors who had wondered whether the company would continue paying the dividend and what BP's liabilities might be. The market is seeing the moves as positive indications that BP is working with the Obama administration in a cooperative manner that could help it in the long run, both financially and from a sentiment standpoint.

The dividend cut represents "a gesture of goodwill and a [public relations] positive," said Nick Kalivas, strategist and vice president of financial research at MF Global. "The fact that they cut the dividend, that shores up the idea that they'll be able to service their debt."

Kalivas added, "the fact that they've put $20 billion into escrow, it's kind of helping the market get its hands around what the company and the government seem to think the liability's going to be. It's removing a little bit of the uncertainty that's been hanging over the stock."

Investors "see this as an end to the financial bleeding," with the $20 billion helping investors get a better idea of what BP's total liabilities might be, said Jason Weisberg, senior vice president at Seaport Securities. In addition, he said, "the way Wall Street perceives this is that it's pretty tough to penalize a company when they're going above and beyond what they're legally bound to do."

After the cost of protecting BP's debt soared to its highest level ever, it pared on the news of the dividend cut and escrow fund. BP's bonds also bounced on the news Wednesday afternoon, helped not only by BP's announcements of the dividend cut and escrow fund, but also by a statement on CNBC from Bill Gross, co-investment chief for Pacific Investment Management Co., that his bond-fund firm has recently begun buying one-year bonds issued by BP.

However, options traders said BP's decision to cancel the previously-announced dividend hurts investors who traded May options assuming the dividend would be paid and have already re-invested the 84 cents a share they assumed would arrive.

"When a CEO cancels a dividend after shareholders have approved it and the stock has traded 'ex-dividend' for a month, option investors can only throw their hands up in disbelief," said Justin Golden, strategist at Macro Risk Advisors. "Dividends are an important input to the formula used for pricing options and it is difficult enough to price them accurately when dividend streams are uncertain. Canceling an approved dividend throws traders' profits and losses off because it violates the pricing formula."

Wednesday's announcement from BP came after a meeting with President Barack Obama, who said the $20 billion is not a cap, and that BP will pay the full costs of the cleanup, including environmental damage. Still, he added, "BP is a strong and viable company and it is in all of our interests that it remain so."

Many investors, however, are still wary.

"I think BP is attractively priced, but it's a different type of investment than a blue chip," says Keith Amburgey, a financial planner in Cresskill, N.J., who began selling BP stock in early May, about two weeks after the rig explosion. "It's not something I would recommend for my typical client."

A number of bond investors are voicing similar concern.

"It's an unanalyzable situation," said W. Frank Koster, chief investment officer at Dwight Asset Management, which focuses on fixed-income investments. Koster said he felt fortunate that the firm exited its bond positions in BP and other companies connected with the Deepwater Horizon rig "at the front end of the spill."

Still, Wednesday's news isn't changing the BP holdings of the Florida State Board of Administration, which still has holdings in BP bonds and equities that amounted to about $103 million in BP bonds and equities on June 11. "We're pension managers," said Dennis MacKee, its spokesman. "We're looking at this from the risk and investment return stand point."

Disclosure I am long BP shares.

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