In a brief three-paragraph letter to Carl-Henric Svanberg, chairman of BP plc (NYSE: BP), Coast Guard Admiral Todd Allen has requested that Svanberg and other “appropriate officials” of BP attend a meeting with top US officials, including President Obama, on June 16th. Allen’s letter pointedly did not mention BP’s CEO Tony Hayward, who is scheduled to appear in Washington on June 15th to testify in front of the House Energy & Commerce subcommittee.
The invitation to Svanberg reinforces the notion that Hayward may be a dead man walking who will be fired as soon as BP gets control of leaking well in the Gulf. There are also rumors that Svanberg himself will be forced out, either instead of or in addition to Hayward as a result of the Gulf disaster.
Is this just another photo op for the president and his administration, the result of which will be more palaver on how the US is going to ensure that BP does the right thing or will it lead to a more substantive outcome? Like, for example, convincing Svanberg to cancel the company’s dividend payments.
There’s a lot at stake here for BP. As of last December, BP’s US net proved reserves totaled just over 3 billion barrels of crude oil, about a third of the company’s total proved reserves. About a third of its revenue and a third of its profit also flow from the company’s US assets.
The US Justice Department has already said it is considering taking legal action to stop BP from paying its dividends in an effort to guarantee that the company doesn’t run out of money before paying the all the costs related to the leaking well. Of course BP takes this off the table by agreeing to cancel its dividend payments. This could be an offer that BP can’t, and shouldn’t, refuse.
There are two good reasons for this. First, canceling the dividend demonstrates that BP means is serious when it says that the company will pay all legitimate claims related to the spill. The move is essentially a $10.5 billion corporate advertising campaign. It’s a little pricey, but it’s worth it to BP to get Congress and the Obama administration to shut up about paying shareholders before paying victims.
Second, by canceling its dividend BP boosts its free cash flow to positive territory, virtually eliminating the chance that the company will have to borrow at exorbitant rates in order to pay for the clean-up. Shareholders with any sense ought to see the long-term benefit of that.
The threat to enjoin BP from paying its dividend is, at this point, merely political theatre. If BP does not cancel its dividend, and the threat becomes reality, neither BP nor the US government will have what it wants.
It does the Obama administration no good whatever to be viewed as hostile and arbitrary to business. But that’s not enough to give BP the win during an election year.
BP can’t win no matter what it does, but it can minimize the size of its loss. As far as shareholder value goes, the right choice is obvious.
