DBRS Downgrades Rating of BP to A (high), Maintains at Under Review - Negative

DBRS has today downgraded the Issuer Rating of BP p.l.c. (BP or the Company) to A (high), with the rating remaining Under Review with Negative Implications. The rating action reflects two material changes that have occurred since the last BP rating action (a downgrade to AA (low) and maintenance of the Under Review with Negative Implications status), namely: 1) the announcement of the establishment of a $20 billion claims fund; and 2) a significant increase in spill flow rate estimates. The rating has been downgraded due to the fact that the increased spill rate estimates have raised the level of uncertainty surrounding the ultimate liabilities, and the funding of the claims fund reduces the Company’s financial flexibility. While neither a cap nor a floor, $20 billion is a very sizeable amount. The current rating level incorporates the assumption that the current relief well efforts will be successful, and recognizes the operating and financial strength of the Company, as well as its substantial liquidity commitment to take responsibility for the spill.

The rating remains Under Review with Negative Implications given the continued significant unknowns, including: 1) the uncertainty regarding the timing of the effort to completely stop the flow, which depends upon the relief well being successfully completed (expected in August); and 2) the continued significant level of uncertainty surrounding the ultimate extent of the spill-related liabilities. While the $20 billion claims fund may serve to reduce political pressure, it does not provide any additional certainty as to the extent of BP’s ultimate spill-related costs. How the Company funds the expenses over the longer term will also determine the extent of the impact on the Company’s creditworthiness.

BP announced that it will create the $20 billion claims fund, to be financed according to a set schedule ($5 billion in total in 2010, and $5 billion in each of 2011, 2012 and 2013 (paid quarterly)). The claims fund will be available only for damage claims and local response costs and specifically excludes fines and penalties which will be paid separately, and is not for the ongoing spill mitigation and clean-up costs. Payments from the fund are to be adjudicated either by an Independent Claims Facility, BP or court order. BP will secure its fund obligation by “setting aside” U.S. assets with a value of $20 billion, with the level of pledged assets declining as BP makes cash payments to the fund (details of the asset pledge are unknown at this time). BP also announced the cancellation of its first quarter dividend and suspension of its next two quarterly dividend payments (approximately $2.6 billion per quarter), stating that it will reconsider its dividend policy in 2011 when it has more insight as to the longer-term impact of the spill. In addition to the dividend suspension, the Company cited various other sources of liquidity, including: 1) committed credit facilities exceeding $10 billion; 2) annual cash flow from operations in excess of $30 billion at current pricing (excluding spill related costs); 3) a reduction in capital expenditures; and 4) planned asset sales of $10 billion over the next 12 months. BP also had cash on its balance sheet of approximately $7 billion as of March 31, 2010. While these mitigating efforts are positive for near-term liquidity, the funding of the $20 billion claims fund, on top of the ongoing spill mitigation and clean-up costs, has accelerated BP’s cash needs and in DBRS’s view has reduced the Company’s financial flexibility and ability to handle any other unexpected cash requirements.

Estimates of the spill flow rate have increased materially, with recent government estimates of between 35,000 and 60,000 barrels/day. In addition to likely increasing the direct clean-up costs and potential claims, increased flow rates could expose BP to significantly higher fines that may be imposed by federal entities.

DBRS will continue to monitor the situation with the rating expected to remain Under Review with Negative Implications until more clarity is reached regarding the timing of the complete stoppage of the spill, more reliable estimates of the extent of the clean-up costs and potential liabilities are available, and BP’s longer-term funding plan is known.

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

The applicable methodology is Rating Oil & Gas Companies, which can be found on the DBRS website under Methodologies.

This is a Corporate rating.