Markets

BP's Gulf Oil Spill: Goodbye Dividend, Hello $20B Escrow Fund

By Kirsten Korosec

Updated on: June 16, 2010 / 4:13 PM EDT / MoneyWatch

BP has agreed to set up a $20 billion escrow fund to compensate victims of the Gulf oil spill, a move that provides a short-term positive boost to its reputation and doles out plenty of long-term pain. In short, BP is giving up a lot to meet that $20 billion figure, which doesn't include the fines and penalties that will likely follow.

BP will:

Suspend its stock dividend until at least January
Put aside $20 billion worth of U.S. assets as collateral until the account is fully funded
Pay another $100 million as compensation for unemployed oil rig workers
Accelerate a planned divestment to $10 billion of its assets over the next year.

What does it get in return? An easing of the government boot that's been on its neck since the Deepwater Horizon oil rig exploded April 20, a short-term image boost and maybe even a slight recovery of its market value, which has fallen by almost half since the disaster began.

The agreement does allow BP to fund the escrow account on a quarterly basis, which will ease the company's financial burden, as I noted earlier when the fund was first proposed. Another good move on BP's part: The company has apparently found a way to avoid borrowing money, which would have been expensive given the collapse in its credit rating from AA to BBB -- just two notches above junk status.

There is one clear loser, at least in the short term: U.S. pension funds, which are heavily invested in BP because of the company's hefty 56 cents-a-share payout, which now produces an effective yield of nearly 10 percent. BP's decision to suspend its second-quarter dividend of $2.6 billion means folks who rely on those payments will be cut off for at least the next three quarters. Specifically, U.S. pension funds, including Calpers, the Teacher Retirement System of Texas and Ohio Public Employees Retirement System, have held onto their stakes in BP despite the steep dive in its share price. UK pension funds, its largest shareholders, have cut their holdings.

Here are further details of the announcement:

BP will set up a $20 billion escrow fund over the next three and a half years;
Payments into the escrow fund will be made on a quarterly basis;
Until the fund reaches $20 billion, BP will set aside U.S. assets as collateral;
Fines and penalties will be excluded from the fund and paid separately;
The fund will be managed by an independent third-party, Kenneth Feinberg, the government's pay czar and the lawyer who oversaw the compensation fund for victims of the Sept. 11, 2001 terrorist attacks;
A three-person panel will be set up to review claims that have been rejected;
Any money left in the fund will be returned to BP;
BP has agreed to set up a $100 million fund to compensate unemployed oil rig workers affected by the closure of the deepwater drilling rigs. Thirty-three rigs were forced to shut down their exploratory drilling operations after Obama established a six-month moratorium on deepwater drilling.

Photo of President Obama from the White House Related: