BP deal with Obama provides some clarity but growth risks emerge

The news oil giant BP has been forced to hand over $20 billion to a US compensation fund and will not pay any dividends this year has provided some much-needed clarity for investors but it has also sparked concern about future growth.

With production already expected to be flat in the current year even before the moratorium in the Gulf of Mexico and last night's agreement with President Obama, there are good reasons to be worried about production growth in the years ahead. There are also worries dividend will not be resumed at past levels.

Fred Lucas, top-rated analyst at Starmine in his sector, is still optimistic.

He believes the overnight news has brought clarity and opened the way for investors to capitalise on the 'very cheap' valuation.

He sees 50% upside for the shares to 510p and is still looking for a dividend of 56 cents in 2011 - the same as in 2009.

Lucas said BP remains a robust franchise and debt markets should be strongly reassured by the gearing outlook and BP’s liquidity position.

He said: 'The measures announced should enable more investors to have far greater confidence in that upside. If the market fails to see this value, the industry could well intervene once the potential financial penalties are better defined, in our view.'

But it was clear from the company's conference call with investors yesterday and the tone of Obama's comments that there is no cap on BP’s liabilities and no real certainty that relations between the US and the company will be any warmer in the months ahead.

Today, chief executive Tony Hayward is speaking to US politicians. Given his repeated slurs against the people affected by the spill and insensitive commentary, he remains a risk to the group's ability to win control of the situation.

Jon Rigby, analyst at UBS said: 'Investors should focus on how persuasive BP is in defending its actions on the Macondo well in the days and hours leading up to the well explosion. This will likely influence the market's view of BP's vulnerability to legal action over and above the clean-up and compensation payments it is making.'

Rigby is also one of a number of analysts that believe future dividends may be lower than in the past. He believes the spill in the Gulf of Mexico shows BP was handing out more money to shareholders than it could comfortably afford to do.

‘After two events in two years when the sustainability of the dividend became almost a sole issue it implies that the payout was probably too high,’ he said.