DBRS Confirms Ratings of BP p.l.c. & BP Canada Energy Co.

Dominion Bond Rating Service (“DBRS”) has confirmed the ratings of BP p.l.c. (“BP” or the “Company”) and BP Canada Energy Company, the latter based on the implicit support and/or guarantee of BP, as noted above, with Stable trends.

BP maintains its predominant market position as the world’s second largest integrated oil and gas company in terms of production and market capitalization. It has also consistently grown production and reserves in the past five years, in contrast to some of its peers. Production growth targeted at 5% - 7% per annum (p.a.) to 2008, without major acquisitions, should be achievable, at least at the lower end. The major contributors include the robust Russian joint venture in TNK-BP helped by discoveries in the new profit centres in the Gulf of Mexico, Trinidad, Angola, and the Asia-Pacific. Furthermore, BP has maintained exceptional financial flexibility with low leverage (debt-to-capital of 20% in March 2005) and strong profitability and cash flow. Its production replacement record continues to surpass most of its peers and reserve replacement costs are kept at low levels of below US$4 per barrel on a three-year average basis.

While very manageable, noteworthy challenges for BP include its upstream strategy in developing regions and aggressive share buyback programs.

(1) Political risks and volatility exist, especially with the Russian operation. The latter, accounting for about one-quarter of total production and a driver for growth, are significant to BP’s long-term prospects. The Russian taxation (US$1 billion in back taxes on TNK-BP are indicated), legal issues, and recent experiences with Yukos are causes for concern.

(2) The share buyback program, approaching US$8 billion in 2004 (25% of 2004 operating cash flow), limits free cash being used to retire debt. The Company intends to distribute all surplus cash flow as long as crude price exceeds US$20 per barrel (provided that all things are equal). The foregoing, coupled with substantial capital investments in long lead-time projects and relatively high dividend payout, could pressure the balance sheet in a weaker pricing environment. Annual capex of US$14 billion - US$15 billion is planned over the near to medium term compared to operating cash flow, which has averaged US$19.5 billion over the past five years.

That being said, BP has demonstrated its ability to maintain one of the more conservative balance sheets through the aggressive growth phase driven by acquisitions prior to 2003. The Company’s philosophy is to keep net debt of 20%-30%. Share buyback is deployed to manage the excessive cash position and capital structure, and will likely be adjusted in a weaker market. In review, continued focus on high growth areas based on long-life assets, coupled with portfolio high grading through divestitures, a low cost base, and favourable market conditions, should keep the financial profile in good standing. For instance, BP is in the process of exiting the loss-making, but small, bulk commodities chemicals business.

Note:
The Commercial Paper rating for BP Canada Energy Company is guaranteed by BP Corporation North America Inc. with implicit support by BP p.l.c.
The Senior Long-Term Debentures are indirectly guaranteed by BP p.l.c. on bonds issued.
Issuer ratings apply to a company's most senior, unsecured debt, if issued, and are not specific to any financial obligation.