Note the fund is to be established over two years, through a combination of dividend cuts and reduction in spending. Moreover, a planned dividend payment for June 21 is being halted, which would appear to be a meaningful concession. From Bloomberg:
Svanberg and Chief Executive Officer Tony Hayward agreed to set aside $20 billion over several years to compensate victims of the spill after Obama in an Oval Office address yesterday called for creation of a fund. BP said it will reduce capital expenditure and sell more assets than planned to free up cash.
“The dividend is off the table,” said Alastair Syme, an oil and gas analyst at Nomura Holdings Inc. in London, before the announcement. “Until they have some clarity on the costs of the spill, they can’t do anything.”
BP’s payments accounted for about 14 percent of all dividends in the U.K.’s benchmark FTSE 100 stock index last year. Fitch Ratings yesterday lowered BP’s credit score by six grades to BBB, two levels above junk, on concern costs will escalate.
President Obama deemed the meeting to be “constructive” and stressed that the $20 billion set-asde was not a maximum payout and that BP would be responsible for all costs, including environmental damage. (Hhm, what might the loss of the brown pelican, if it comes to that, be worth?)
The fund will be “independently” administered by Kenneth Feinberg, who was in charge of overseeing executive compensation for the TARP (aside: he has gotten himself in the midst of particularly politicized and thankless tasks. He also administered the process of compensating 9/11 victims). The administration of the fund had been a bone of contention.
The Wall Street Journal reports that BP “voluntarily” agreed to set aside an additional $100 million to compensate Gulf workers idled by the moratorium on deep sea drilling.
As we noted via links in Links today, credit concerns about the oil company have escalated. Credit default swaps prices on BP have an implied default risk of 35%, and at least one counterparty. Bank of America, is not willing to take on BP oil contract risk further out than one year.
Update: This comment came via e-mail from former oil industry employee Glenn Stehle:
The outcome of Obama’s meeting with BP was an incredible disappointment. After all the tough talk, the end result is that Obama came away with what the little boy shot at.
According to the NY Times, “the oil giant will create a $20 billion fund to pay claims.”
But here’s the kicker: the preliminary terms of Obama’s agreement with BP “would give BP several years to deposit the full amount into the fund so it could better manage cash flow, maintain its financial viability and not scare off investors.”
So BP is allowed to live while the Gulf dies.
The tragedy is that the people on the front lines of this battle don’t need money and resources in a month, or six months, or in “several” years. They need the resources now.
Could St. Bernard Parish President Craig Taffaro have made it any clearer? “Just like he [Obama] referred to WWII and putting a man on the moon, those operations were successful because there were equipment and resources provided to make those missions successful,” Taffaro spelled it out for the President. “That’s what we need here in the Gulf Coast Region, enough resources and assets so that we can make this a successful fight against this oil spill.”
But BP, a company who generated $27.7 billion in cash last year and paid out $10.5 billion in dividends, is allowed to diddle, given years to come up with $20 billion.
“Let’s get serious about this,” Tony Kennon, Mayor of Orange Beach, Alabama pleaded. “I feel like sometimes we’re in the Land of Oz. This is a catastrophe of Biblical proportions, and we’re acting like it’s an everyday, run-of-the-mill oil spill. It is time to attack the problem and fix it offshore.”
But apparently Obama learned nothing during his well-publicized tour of the Gulf Coast region yesterday. At least he didn’t listen to anything the guys in the trenches had to say. BP should “not be in a position where they can have power to veto anything,” Taffaro counseled. The government “should be able to force the issue here, and that’s where the breakdown has come in.”