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

DBRS Limited (DBRS) confirmed the Issuer Rating of BP p.l.c. (BP or the Company) at “A” with a Stable trend. The rating confirmation is underpinned by (1) BP’s sizable footprint in a number of countries around the globe, which provides the Company economies of scale; (2) diversification benefits from the Company’s significant downstream operations that partially mitigate the risk of low commodity prices; (3) long reserve life with low base decline rates, which provides BP with flexibility to adjust its capital expenditure (capex) without material impact on production levels; and (4) organic growth potential. DBRS also notes that approximately one-third of the Company’s production is from Production Sharing Agreements that are less sensitive to the price of oil. The Stable trend underscores the improvement in oil and gas (O&G) prices in 2017, a reduction in BP’s operating costs and greater certainty with regard to future liabilities connected with the Gulf of Mexico oil spill. Key challenges for the Company include managing its debt levels, which have risen over the last two years, and successfully executing its planned projects, which are expected to add approximately 800,000 barrels of oil equivalent per day (boe/d) of production by 2020.

Over the last few years, the Company has focused on reducing operating costs and delivering volume growth from new projects. BP reduced unit production costs at its upstream segment from $12.75/barrel (bbl) in 2014 to $7.20/bbl in H1 2017 and achieved performance improvements of approximately $3.0 billion in the downstream segment over the same period. A majority of the cost reductions are expected to be sustainable, as they have been achieved through efficiency gains and process improvements as opposed to price reductions. The Company has also commissioned five of seven new projects scheduled for 2017, with the rest on schedule to be commissioned by the end of the year. The Company expects the new projects to add 500,000 boe/d of new production by the end of 2017. On full ramp-up, the new projects are expected to generate higher operating cash margins and incur lower ongoing capital costs as compared with the Company’s base portfolio. DBRS expects that beyond 2017, the reduction in operating costs and production from higher-margin projects should allow BP to fund its capex and dividends at Brent Oil price of approximately $50/bbl.

As a result of free cash flow deficits and payments related to the Gulf of Mexico oil spill, BP’s gross and net debt levels have increased over the last two years. The Company’s net debt-to-capital ratio of 28.8% at June 30, 2017, is at the higher end of its target band of 20% to 30%. The ratio is expected to improve in H2 2017, as the Company realizes proceeds from planned asset divestments ($4.5 billion to $5.5 billion), but remains subject to successful completion of divestments. Based on a base case Brent Oil price assumption of $50/bbl in 2017 and $55/bbl in 2018 and 2019, DBRS expects the Company’s key credit metrics to improve primarily driven by higher cash flow from operations. However, a material and prolonged reduction in O&G prices from DBRS’s base case assumptions may result in an increase in debt levels and deterioration of key credit metrics. As a buffer, DBRS is of the opinion that liquidity (supported by $23.2 billion of cash and cash equivalents) is sufficient to fund possible cash flow deficits in the event of lower O&G prices.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries, which can be found on dbrs.com under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did not participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

This is an unsolicited credit rating.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.