BP shares drop as dividend cut seen more likely

Shares in BP fell 6 percent on Wednesday as investors saw it increasingly likely the oil major would suspend dividend payments, under U.S. political pressure due to its oil spill in the Gulf of Mexico.

People are resigning themselves to the fact that there may be a suspension of the dividend, said Tony Shepard, oil analyst at brokerage Charles Stanley in London.

BP shares traded down 6.2 percent at 1408 GMT, lagging the 0.9 percent drop in the STOXX Europe 600 Oil and Gas index <.SXEP>. The energy giant's shares lost 5 percent in London on Tuesday.

Until last week most analysts said that BP was not likely to even reduce the dividend.

Since then, President Obama has mentioned the dividend a number of times in highly critical remarks about BP and on Tuesday a group of over 30 members of congress called on BP to cut the payout, which was expected to top $10.5 billion this year.

Evgeny Solovyov, oil analyst at Societe Generale said in a research note on Wednesday that he saw a 50 percent probability BP will skip its second quarter dividend, while on Monday, Goldman Sachs predicted the oil giant could cut its dividend for two quarters.

The company's American depositary shares trading in New York fell 2.3 percent just after the opening bell on Wednesday. They were the third-most actively traded shares on the New York Stock Exchange.

The dividend is due to be announced on July 27, although BP could say at any time if it planned to cut it.

A suspension of dividend payments would have a big impact on the UK investment community as BP accounts for 12-13 percent of dividend payments from companies in the FTSE 100 index of the largest UK companies.

Many private shareholders -- often retirees -- rely on BP dividends for a chunk of their income. Some pension and income investment funds also own the stock for its high payout. These could be forced to sell out if BP cuts its dividend, potentially accelerating the drop in BP's shares.

Forty percent of BP's investors are in the U.S., so any dividend cut would hit many Americans, although the company's importance to the broader market is less there.

Separately, Iain Conn, the head of BP's refining unit, who, along with CFO Byron Grote has taken on much of the day to day running of the company while CEO Tony Hayward focuses on the oil spill, said BP's operations elsewhere were continuing to operate very effectively.

The cost of protecting BP debt against default also rose sharply on Wednesday, with the five-year credit default swap rising 52.5 basis points to 312.5 basis points, according to Markit iTraxx data.

BP's five-year CDS has more than tripled from 101 basis points since the end of May.

(Additional reporting by Ernest Scheyder in New York and Natalie Harrison, Joanne Frearson, Harpreet Bhal in London; Editing by Dan Lalor, Mike Nesbit)