DBRS Confirms BP at AA (high)

DBRS has today confirmed the Issuer Rating of BP p.l.c. (BP or the Company) at AA (high), with a Stable trend, based on the Company’s relatively strong financial profile, low-cost structure and its above-average reserve replacement track record. In addition, new top management has addressed previous issues by simplifying the organizational structure with a cost reduction program underway to improve operational efficiency, and halted the gradually declining production trend (since the 2005 peak) in Q1 2009. It has also succeeded in rectifying the operational integrity issues in the United States, restoring full operation at Prudhoe Bay (Alaska) and at its Texas City and Whiting refineries. In 2008, nine major development projects came on stream, including the Thunder Horse field (start-up previously delayed), reaching 200,000 boe/d (gross) of production at year-end and making BP the largest producer in the Gulf of Mexico. The Company has also settled the TNK-BP (50/50 Russian joint venture) dispute with a revised shareholder agreement and three independent board members instituted to resolve potential further issues.

Despite the sharp drop in commodity prices and the global recessionary climate, net debt-to-capital should remain within the target range of 20% to 30% (23% at March 31, 2009), with net debt-to-cash flow at 0.99 times for the last twelve months ending March 31, 2009 (LTM 3M2009) and 0.77 times in 2008. Based on WTI at $60/b, the Company’s operating cash flow supplemented by asset disposal proceeds (projected at $2 billion to $3 billion) is expected to remain sufficient to fund capex and dividends, projected at below $20 billion and between $10 billion and $11 billion, respectively, for 2009. DBRS expects BP to maintain sufficient financial flexibility to manage its capital structure within the context of the current rating, including limiting its share buyback activity in a lower commodity pricing environment.

BP is more highly leveraged, with less cash flow support relative to its peers, primarily as a result of its prior strategy to pay out all excess cash flow through dividends and substantial share repurchases, the latter of which is currently suspended. The above measures, taken primarily to focus on re-investment in the upstream section, streamline operations, reduce its cost base and grow production, should further improve BP’s operational and capital efficiency, based on projects under development and those started up in 2007 and 2008 (including Atlantis and Thunder Horse, respectively). BP maintains the lowest cost base among its peers (reserve replacement cost of $9.57 per barrel (/boe) on a three-year average basis, or estimated $12.07/boe excluding equity-accounted investments, mostly its interest in its Russian joint venture, TNK-BP), with about 95% of all reserve additions achieved through the drill bit over the last three years. The Company led its peer group in organic production growth over the past five years, and is at par on growing reserves, primarily due to the TNK-BP joint venture established in 2002.

Production growth is projected at an average of 1% to 2% p.a. to 2013, compared with a flat profile for the next couple of years for some of its peers. With about 16 % of its 2008 reserves (estimated similar percentage for production) under production sharing agreements, BP is relatively less exposed to the associated volatility. Longer-term projects include BP’s 50/50 partnership arrangements with Husky Energy Inc. in March 2008 to create an integrated North American heavy oil business to access the very long-lived Canadian oil sands, which could ultimately add about 10% to BP’s current North American production (with first production start-up expected in 2013). This move is in line with the Company’s plans to undertake major upgrades and reconfigurations at its U.S. refineries (principally the Whiting refinery) to enhance its capability to handle heavy Canadian crude oil. The U.S. operations currently account for about 40% of BP’s assets and capital spending. Other major prospects include developments in the deep water Gulf of Mexico, Algeria, Angola, Egypt and Asia-Pacific gas, with Alaska gas expected to come on stream beyond the middle of the next decade.

TNK-BP should continue to be one of the key contributors to BP’s production and reserves (with less impact on operating earnings (about 12% in 2008)), although political risk elements remain, as seen in the past two years. DBRS expects the Company to manage its political risk profile in an appropriate manner for the credit rating through portfolio re-balancing, as evident in the past. The oil sands joint venture is a case in point to refocus on growth developments in countries within the Organization for Economic Cooperation and Development, as well as continuing developments in the Gulf of Mexico and Alaska.

With most of the operational and political issues behind and continued cost reduction and optimization efforts, BP’s strong financial profile, coupled with one of the lowest cost bases in the industry and a more simplified and focused operational business model with geographic diversification, should provide it with a competitive advantage to weather a soft pricing environment (albeit one that is improving from the low levels seen in Q1 2009).

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.

This is a Corporate rating.