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BP on the Defensive as Shares Drop

THE WALL STREET JOURNAL

By JAMES HERRON JUNE 10, 2010

[BP0610]

LONDON—BP PLC said Thursday it sees no justification for the collapse in its share price, even as the U.K. oil major admitted that the cost of the Gulf of Mexico oil spill has risen to $1.43 billion and U.S. politicians pushed for the company to assume even greater liabilities.

BP shares opened down 11% in London Thursday, taking the company’s value to a 13-year low, following a 16% fall in its U.S.-listed shares Wednesday. Shares were recently down 9.2% at 356 pence ($5.17), on a slightly lower London market.

The company has lost almost £58 billion in market capitalization since the April 20 disaster, when an explosion aboard the Transocean Ltd. drilling rig Deepwater Horizon killed eleven men and triggered the massive oil spill.

“The company is not aware of any reason which justifies this share price movement,” BP said in a statement. “BP faces this situation as a strong company.

“Under the current trading environment, we are generating significant additional cash flow. In addition, our gearing is currently below the bottom of our targeted range,” the company said. “Our asset base is strong and valuable, with more than 18 billion barrels of proved reserves and 63 billion barrels of resources as at the end of 2009.”

BP is having greater success in capturing oil leaking from the well, collecting around 15,000 barrels a day currently, but ever-harsher rhetoric from the U.S. administration is worrying investors.

The Gulf Oil Spill

See graphics covering how the spill happened, what’s being done to stop it, and the impact on the region.

Timeline

Follow key developments since the initial explosion.

There is immense political pressure for BP to halt dividend payments. And the Obama Administration demanded Wednesday that BP pay millions of dollars in salaries of oil-industry workers laid off because of the federal moratorium on deepwater drilling.

Analysts said the political mania is clouding the economic reality of the oil spill. “As the political rhetoric and media frenzy intensify, BP continues to make good progress containing that well,” said JPMorgan Cazenove analyst Fred Lucas. BP may soon be able to capture more than 15,000 barrels of oil a day from the well, he added.

Citigroup retained its “buy” recommendation on BP stock, although it raised its assessment of the risk. “BP will generate around $40 billion of cashflow a year between 2011 and 2013 on our estimates—enough to pay the $10 billion dividend and fund the Macondo spill response,” it said.

Even if BP bows to political pressure and cancels its second-quarter dividend, the company would still offer a high 6.8% yield for 2010, the bank added.

To quell the fear that is driving the collapse in its share price, Morgan Stanley said BP’s board should make its intentions regarding the dividend clear before its second quarter results announcement on July 27.

“The share price reaction is telling BP’s board to show its hand quickly,” Morgan Stanley said. “Investors will want to see the board reiterate confidence in the management team. Without that, political pressure could continue to outweigh fundamental value.”

Write to James Herron at [email protected]

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