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BP Tries to Reassure Shareholders

For more than 10 weeks, BP has focused on the challenge of plugging its gushing oil well a mile below the surface of the Gulf of Mexico. It has also struggled to placate angry gulf residents and government officials and reassure a public frustrated by the company’s inability to stop the spill.

Now — as it appears BP might complete drilling its relief wells by late July or August — the company is beginning the equally difficult job of regaining the confidence of its stockholders and business partners.

In recent days, BP’s chief executive, Tony Hayward, whose leadership has been roundly criticized by some in the United States, has been busy talking to the company’s top shareholders to convince them that BP can pay for the spill without jeopardizing growth.

Mr. Hayward recently met with officials in Russia and Azerbaijan, and on Wednesday, he was in the United Arab Emirates to seek support from the region’s rich investors and reassure government officials that BP would continue to be a reliable partner.

Tony Hayward
Getty Images
Tony Hayward

The company has also begun to talk to potential buyers for the $10 billion of assets it intends to sell to help pay for the costs of the spill.

Although no deals or big investments have been announced, investors have begun crawling back into the battered stock. This week, BP’s American shares have risen 13 percent, although they are still down 45 percent since the April 20 explosion of the Deepwater Horizon rig.

“I think the company has turned a corner here,” said Thomas S. Hull, chief investment officer of Lowry Hill Investment Advisors, a Minnesota money manager, which has sold much of its BP stake. “What I’m hearing and seeing from BP now is they’re being more conservative in terms of their estimates of the size of the damage.”

Of course, many unknowns remain, including how much BP will ultimately have to pay out for the spill. So far, BP says, it has spent $3.12 billion on relief efforts and cleanup operations.

Analysts currently estimate BP’s total liability in the accident at $20 billion to $70 billion, an unusually wide range.

A continued drop in the price of oil could also hurt BP’s finances. Each $1-a-barrel drop in the price of oil cuts BP’s profits by $70 million. Oil prices in New York have lost $10 a barrel in the last two months, and now trade at $74 a barrel.

Still, the company’s prospects appeared to stabilize after top BP officials met with President Obama three weeks ago and agreed to establish a $20 billion escrow fund to pay claims, analysts said.

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The deal defused tensions between the administration and the company. It also gave BP the chance to spread out costs related to the spill. BP is expected to make an initial payment of $3 billion in the third quarter of this year. Another payment, of $2 billion, will follow in the fourth quarter. The company will then pay $1.25 billion each quarter until the fund reaches $20 billion at the end of 2013.

The company continues to generate substantial cash flows, which it said would reach $30 billion this year. It discontinued its dividend this year, saving about $8 billion, and will reduce its capital spending by several billion dollars over the next year.

Meanwhile, BP, based in London, has lined up billions of dollars in new short-term credit lines from banks.

It also plans to sell $10 billion worth of nonstrategic assets within the next 12 months. One candidate for sale is BP’s 60 percent stake in an Argentine producer, Pan American Energy, which is valued at $9 billion.

“BP faces this from a position of strong assets, strong balance sheet, strong operating performance, strong cash flows, and is now poised to take the long journey of rebuilding confidence after this terrible accident,” said Andrew Gowers, a company spokesman.

The company plans to outline its new strategy and update investors on its financial health when it reports its second-quarter earnings on July 27.

“They are building up a cash treasure chest,” said Alex Morris, an analyst at Raymond James & Associates. “A company like BP has the cash flow and the assets to handle a hit like this once. Of course, the legal liability remains a huge uncertainty right now, but whatever it may be, proceedings will last for years.”

With energy demand set to expand over the next few decades, BP should have no trouble finding buyers for the assets it decides to sell, said Mr. Morris. “Foreign state-run companies, like the Chinese, are voraciously scooping out energy projects, so there are definitely buyers out there.”

Although BP has ruled out issuing additional shares to new investors, it is encouraging supporters to buy stock in the open market.

The head of Libya’s national oil company, Shokri Ghanem, praised the company this week, telling Bloomberg News that BP’s shares were undervalued and constituted a buying opportunity. BP is one of the largest foreign investors in Libya, where it has pledged to invest about $1 billion.

“With the relief wells appearing to be on track,” Neil McMahon, an analyst at Bernstein Research in London, wrote in a research note to clients, “we may finally be arriving at a point where things could start getting better, rather than worse, for BP.”