DBRS Downgrades Rating of BP p.l.c. to A, Stable Trend

DBRS has today downgraded the Issuer Rating of BP p.l.c. (BP or the Company) to “A” from A (high), and re-established a Stable trend. This removes the rating from Under Review with Negative Implications, where it was placed on June 2, and maintained on June 9, and June 17, 2010, when the rating was downgraded consecutively from AA (high) to A (high) (see separate press releases). The rating downgrade realigns BP’s business and financial risk profiles with its peers, taking into consideration uncertainties associated with potential substantial fines and penalties, over a number of years, related to the Macondo well oil spill (the Spill), which was ceased in mid-July with the well permanently capped on September 19, 2010. The aforesaid potential liabilities are beyond the $20 billion claims fund established by the Company in June 2010, and exclude any recovery from the other 35% Macondo partners. The Stable trend reflects DBRS’s expectation that BP will be able to restore and sustain its financial metrics in line with the “A” rating now assigned by year-end 2011 as a result of significant steps taken to bolster its liquidity, to conserve cash and to sell substantial assets by year-end 2011, coupled with its continued strong cash flow generating ability. DBRS is cognizant of considerable uncertainties faced by BP as mentioned above, including potential litigation, investigations into the causes of the Spill and the potential impact on BP’s position in the United States, particularly in the Gulf of Mexico.

BP maintained approximately $7 billion of cash balances and $16 billion (currently $17 billion) of unused credit facilities at June 30, 2010 (6M 2010). The proposed $3.5 billion of bond issues scheduled to settle on October 1, 2010, add to liquidity. BP also plans to reduce its net debt level to $10 billion to $15 billion ($23 billion) by year-end 2011, underpinned by its divestiture programs of up to $30 billion, primarily in the upstream segment, which is expected to have only a modestly negative impact on operating cash flow. Approximately $10 billion of asset sales have been announced to date with certain sales concluded (including the $5 billion upfront payments on sales to Apache Corporation). Capital spending is projected at a reduced level of about $18 billion for each of 2010 and 2011, compared with approximately $30 billion of cash flow for the last 12 months ended June 30, 2010. The latter included about $3 billion of pre-tax clean-up and other costs related to the Spill (about $9.5 billion spent to date), which formed part of the $32 billion of provisions ($22 billion after tax) set up also for funding the $20 billion claims fund mentioned above. In addition, BP has suspended its 2010 dividend distributions for at least three quarters (approximately $2.6 billion per quarter) and will reconsider its dividend policy in the spring of 2011, when there is more insight into the longer-term impact of the Spill, including potentially more costly crude oil exploration and production activities in the Gulf of Mexico as a result of the proposed regulatory overhaul.

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.