UPDATE: BP Shares Surge After $20B Oil Spill Fund Deal

(Updates throughout with analyst comment.) By James Herron Of DOW JONES NEWSWIRES LONDON (Dow Jones)--Shares in U.K.-listed oil giant BP PLC (BP.LN) jumped as much as 9.8% in London Thursday morning after the company struck a deal with the Obama administration a day earlier to set aside $20 billion to cover Gulf of Mexico oil spill costs by slashing spending. At 1021 GMT BP shares were up 7.8%, or 26 pence, at 363p, leading the FTSE 100 index. Several analysts upgraded the embattled company to a "buy" recommendation, despite BP's promise to cancel at least $7.8 billion in dividends, sell off $10 billion in assets and reduce capital expenditure by at least $4 billion as it looks to build up the $20 billion fund over the next 3 1/2 years. The deal "will alleviate much of the political pressure that has been building in the U.S." said HansonWesthouse analyst David Hart. "While [BP Chief Executive] Tony Hayward must still face Congressional hearings later [Thursday] he does so in a better position than he would have done earlier in the week." BP has clarified the most important issues hanging over its shares, which have fallen more than 40% since the April 20 Deepwater Horizon accident in the Gulf of Mexico, and "we think the balance of risk and reward has shifted enough to upgrade the stock to buy," said Collins Stewart analyst Gordon Gray. BP struck the agreement with U.S. President Barack Obama at the White House amid intense political pressure spurred by a steady stream of oil spewing into the Gulf and washing up on beaches and marshes. The chief advantage of the deal for BP was the scheduling of payments to the $20 billion fund over more than three years, "which avoids an emergency call on debt," said NCB Stockbrokers analyst Peter Hutton. BP will pay $3 billion into an escrow account in the third quarter of this year and another $2 billion in the fourth quarter. This will be followed by payments of $1.25 billion per quarter until the $20 billion has been paid in, BP said in a statement. Some industry analysts, notably Fitch who downgraded BP debt six notches to just above junk Tuesday, feared that the U.S. authorities would demand upfront payment of the $20 billion, which could cripple BP financially. However, several analysts cautioned that while BP may have eased some of the fears about its short-term burden, it still faces longer-term liabilities that remain highly uncertain. "The $20 billion claims fund draws a line in the sand of sorts," said Evolution Securities analyst Richard Griffith. "It doesn't cap BP's liabilities nor cover fines and penalties but does clarify how BP will settle legitimate claims and cleanup costs." NCB's Hutton added that BP would gradually set aside an additional cash reserve of $10 billion to deal with future costs from the Deepwater Horizon. Company Web site: http://www.bp.com -By James Herron, Dow Jones Newswires +44 207 842 9262; selina.williams@dowjones.com (END) Dow Jones Newswires June 17, 2010 06:26 ET (10:26 GMT)