Picture Perfect Candice Swanepoel Poses in Victorias Secret Bikini (19 Photos)

BP a rare company able to absorb a $20bn payment for mistakes.

The Star (Amman, Jordan) June 21, 2010 By Steven Mufson How many companies could take a $20 billion body blow and still left be standing?

Not many. The amount of money BP said it would plunk into an escrow fund for oil-spill claims is enough to cover the entire NASA budget for a year. ItAAEs enough to buy all the shares of the Kellogg Co. And itAAEs larger than the annual economic output of 90 countries.

But BP is an unusual company. It made profits of $5.6 billion in the first quarter of this year and $14 billion in 2009. It produces about 2.5 million barrels a day of crude oil from Russia to Angola, from BritainAAEs North Sea to AlaskaAAEs North Slope. Until Wednesday, BP also had been planning to pay out $10.5 billion in dividends this year, which would still have left it with $5 billion to $10 billion in spare cash.

It could raise the money for the escrow fund this year without borrowing another dime.

Still, BP has struggled to convince markets that it can meet its obligations to both investors and victims of the oil spill in the Gulf of Mexico. In eight weeks, BP stock has fallen to about half its earlier value. On Tuesday, Fitch Ratings slashed BPAAEs credit rating to BBB, two rungs above junk. And early on Wednesday morning, investors in credit default swapsAuan insurance-like financial instrumentAuwere pricing an almost 40 percent chance the oil giant would default on its debts within five years. this web site bp stock price

So while the deal struck at the White House on Wednesday was designed in part to reassure citizens of the Gulf Coast that BP would put aside enough money for their claims, the deal was also designed to give shareholders a sense that the financial damage was manageable and could, over time, be contained along with the oil spill.

ThatAAEs why one thing BP asked in exchange for the big escrow fund was a signal from President Barack Obama that he was not trying to run the company out of business. AoBP is a strong and viable company,Ao the president said after his meeting with BPAAEs chairman and top executives, Aoand it is in all of our interests that it remain so.Ao That is hard to accept for many Americans who want to punish BP. But anything else might be counterproductive. So far, BP, drawing on its worldwide operations, has paid for everything from National Guard troops to air quality tests done by the Environmental Protection Agency, from $5,000 checks for shrimpers to the $100 million or so for each relief well.

Investment analysts appeared reassured after the White House meeting. AoIt takes the political heat off the company and it steadies the ship in rough waters,Ao said Fadel Gheit, an oil analyst with Oppenheimer & Co. AoBP is stabilizing its financial position so it can handle cleanup costs and damages.Ao BP stock rose 1.4 percent on Wednesday, closing at $31.85 a share. And the cost of BP credit default swaps dipped slightly, indicating a bit less anxiety about corporate default.

So how does a company raise $20 billion?

BPAAEs chairman, Carl-Henric Svanberg, said the company would suspend its dividend for three quarters, starting with the payment that had been scheduled for Monday. That will give it $7.8 billion in cash. see here bp stock price

The company also said it would sell about $7 billion worth of assets, a fraction of its total and less than what it agreed to pay for Devon Energy assets earlier this year.

The companyAAEs chief financial officer, Byron Grote, said that BP would trim its capital spending plans by about 10 percent this year and next, saving another $2 billion in 2010 and $2 billion or so in 2011.

The company still expects to generate $5 billion or more a year in extra cash from operations.

Moreover, the deal with the White House lets BP spread out its payments to the fund. The biggest chunks will come up front: $3 billion in the third quarter, $2 billion in the fourth quarter and then $1.25 billion a quarter until the full amount is paid in three years. To provide a guarantee that it will make those payments, the company said it is Aosetting asideAo $20 billion of US assets; as it makes payments, those assets will be freed up. BP will continue to earn money on those assets, but the government will effectively have a lien on them.

The escrow fund leaves many uncertainties. A BP official said, AoItAAEs not a ceiling and itAAEs not a floor.Ao Fines and penalties wonAAEt be covered by the fund. Many plaintiffs will continue to pursue lawsuits separately.

But, Gheit said, AoWe think BP has the financial flexibility to survive this crisis.Ao If any money is left over, it will be returned to BP.

BPAAEs Grote said the plan should Aogive more comfort to those on Gulf Coast of the United States, give more comfort to government, and we hope it will give more comfort to our shareholdersAo. He said that while the company was financially strong, Aowe think itAAEs important to take a deeply conservative fiscal approach to running our business at this time.Ao And he said he hoped shareholders who will not be getting their dividends would understand that AoitAAEs an extraordinary thing for the company to do, but this is an extraordinary situation we find ourselves inAo.

WPBLOO 2009 Jordan Press & publishing Co. All rights reserved.

Provided by Syndigate.info an Albawaba.com company