BofA Merrill, Seymour cut BP from top rating

BANGALORE (Reuters) - BofA Merrill Lynch and Seymour Pierce downgraded BP Plc from their top ratings, after the oil major decided to set up a $20 billion fund for oil spill-related claims, suspend dividend and sell some assets.

BofA Merrill and Seymour Pierce downgraded BP shares to "neutral" or its equivalent rating. They previously rated the stock at "buy."

"Whilst we still believe that the asset base is ultimately deep enough to help BP weather the storm, we believe that the measures taken will materially erode BP's competitive advantage versus peers for the foreseeable future," BofA Merrill analysts led by Alejandro Demichelis said.

BP's trading operations, which was historically a material income source, could also be handicapped as counterparty risk grows, BofA Merrill analysts said.

The outcome of the four-hour-long talk on Wednesday between BP officials and the U.S. President Barack Obama, failed to offer greater clarity on the ultimate liability of the worst oil spill in the U.S. history, they said.

The April 20 explosion on an offshore rig in the Gulf of Mexico leased by BP killed 11 workers and ruptured a deep sea well. The ensuing spill has fouled 120 miles (190 km) of U.S. coastline, imperilled multi-billion dollar fishing and tourism industries and killed birds, sea turtles and dolphins.

BP's decision to set up a spill fund, which the company will finance partly by selling $10 billion in assets, has eased pressure on the British energy giant, whose share price has withered amid uncertainty over the ultimate cost of cleanup, claims and fines.

Analysts at Collins Stewart welcomed the two key decisions -- the setting up of a claims response fund and a dividend cut -- which have been overhanging the shares.

Collins Stewart upgraded BP shares to "buy," citing a shift in the balance of risk and reward, while acknowledging that the risks on the stock remain high partly due to environmental concerns.

BP shares, which nearly halved in value since the explosion, rose 8 percent on the London Stock Exchange.

U.S.-listed shares of BP rose 2 percent to $32.45 in morning trade.

DIVIDEND CONCERNS

Analysts said BP, which will consider resuming dividends during the fourth quarter, will not be able to revert to previous levels of payments.

BP on Wednesday said it would cancel the first-quarter dividend due for payment on June 21, and would not declare interim dividends for the second and third quarters of 2010. The payouts were expected to be about $2.6 billion per quarter, in line with recent quarters.

BofA Merrill analysts expect BP will not be able to resume dividend payments in fiscal 2010, citing lower upstream growth expectations, lower trading revenues and higher costs.

"With the potential recovery now set to take well beyond our 12 month investment horizon and with real risk that there will be no resumption in the dividend in fiscal 2010/first-quarter of 2011, we downgrade BP to neutral," BofA Merrill analysts added.

BofA Merrill cut its price target on BP stock to 400 pence from 575 pence.

(Reporting by Tenzin Pema; Editing by Gopakumar Warrier)