DBRS Confirms BP p.l.c. at “A”, Stable Trend

DBRS has today confirmed the Issuer Rating of BP p.l.c. (BP or the Company) at “A” with a Stable trend, based on results and corporate developments in the six months ended June 30, 2012 (H1 2012).

BP’s financial profile weakened marginally in H1 2012, as decreased production coupled with price weakness in Q2 significantly impacted earnings and cash flow. Adjusted debt-to-capital and total debt to cash flow increased to 39.1% and 1.70 times, respectively (from 38.1% and 1.24 times at December 31, 2011), but are still within the parameters of the current rating category.

The Company’s capital expenditure program for 2012 ($22 billion) along with increased dividends (estimated at approximately $6 billion) are expected to be funded primarily through operating cash flow for the year, based on results to date. Should cash flow not be sufficient, the shortfall is expected to be funded through proceeds from asset divestitures, and existing liquidity if required. Given that capex is expected to remain at current levels (and potentially higher) for the foreseeable future, without a rebound of cash flow, BP’s financial profile could face negative pressure, specifically once asset sales are complete.

BP has indicated its intention to pursue a sale of its interest in TNK-BP, which accounts for about 30% of BP’s total production. DBRS would expect BP to use a portion of proceeds (which may be up to $30 billion) to de-lever to a reasonable level to compensate for the expected loss of cash flow. In the absence of de-levering, the impact of lower cash flows with current debt levels would result in negative pressure on metrics.

The confirmation also reflects BP’s efforts to restore and sustain its credit metrics in line with the “A” rating since the Macondo well oil spill (the Spill) on April 22, 2010 (permanently capped in September 2010). DBRS notes that in March 2012, BP announced that it had reached a settlement with the Plaintiff’s Steering Committee (PSC), subject to final court approval, to resolve the substantial majority of legitimate economic loss and medical claims stemming from the Spill. BP estimates that the cost of the proposed settlement, expected to be paid from a $20 billion Spill claims trust, would be approximately $7.8 billion, and will be adequately covered by the initial $41 billion ($38 billion net of settlement credits as of June 30, 2012) provision recorded in 2010. DBRS views this proposed settlement as a credit positive, as it removes considerable uncertainty related to future Spill costs. There is still, however, uncertainty surrounding the federal negligence case under the U.S. Clean Water Act, which could result in penalties as high as $21 billion (DBRS estimate). If resolution of the federal negligence case occurs for a significantly lower amount, DBRS would consider positive rating action.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Oil and Gas Companies, which can be found on our website under Methodologies.