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. On September 30, 2010, DBRS downgraded BP’s rating to “A” from A (high) and removed it from Under Review with Negative Implications, where it was placed on June 2, 2010, 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 for details). The “A” rating has realigned 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) on April 22, 2010 (permanently capped in September 2010), and the potential impact on BP’s position in the United States, particularly in the Gulf of Mexico (GOM). These potential liabilities are beyond the $20 billion claims fund (the Fund) established by BP in June 2010 and another $20 billion in provisions set up for clean-up and other costs. The aforesaid excludes any recovery from the other 35% Macondo partners. BP is a 65% owner and operator for the project. The Stable trend is based on DBRS’s continued expectation that BP will restore and sustain its financial metrics in line with the “A” rating assigned by year-end 2011. The underpinnings include steps taken to bolster the Company’s liquidity, to sell substantial assets by 2011 for debt reduction and plans to increase financial flexibility and to reinforce risk management and operational safety/reliability (outlined in more detail below). BP continues to generate strong cash flow, and DBRS expects it to grow production/reserves from a somewhat smaller, but still substantial asset base.

(1) Significant measures taken in 2010 have bolstered BP’s liquidity, consisting of about $18.6 billion cash balances and $12.5 billion in totally undrawn bank lines at YE 2010 (the latter scheduled to be reduced to $0.3 billion by the fall of 2011). DBRS expects BP to renegotiate its standby facilities, potentially for smaller amounts, ahead of expiry in order to maintain a sufficient liquidity buffer as publicly stated by the Company. It also raised $6.25 billion through bond issuance in Q4 2010, and another $4.9 billion (equivalent) offering in Q1 2011. In addition, BP cut three-quarters of its dividends in 2010 to conserve cash. A SCRIP dividend (SCRIP) program was instituted, when dividends resumed for Q4 2010 in February 2011.

(2) Substantial divestiture programs to sell about $30 billion of assets by year-end 2011 are expected to reduce net debt substantially ($21 billion net of cash balances at December 31, 2010). This is in line with the Company’s more conservative net debt-to-capital ratio target of 10% to 20% (20% to 30% prior to the Spill), improving its financial flexibility among potential liabilities related to the Spill. The substantially lower balance sheet leverage should be achievable at the high end as additional asset disposal proceeds of $13 billion are expected in 2011, following about $17 billion in proceeds received in YE 2010 (approximately $24 billion agreed sales achieved to date). Surplus proceeds should supplement funding of the $7 billion Reliance Industries Limited transaction (Reliance Transaction) recently announced (and mentioned in more detail below), and $5 billion in payments to the Fund ($1.25 billion per quarter payment is scheduled to be completed by YE 2013), helped also by higher crude oil prices expected in 2011

Based on the Company’s 2011 guidance, the $20 billion projected capex ($18 billion in 2010 plus $4.8 billion acquisitions), with about three-quarters for the upstream operations (upstream), together with dividends estimated at close to $6 billion (resumed for Q4 2010 at half of the previous level of $0.07 per quarter) should be covered by normalized operating cash flow (excluding the impact of the Spill and before working capital changes) estimated at about $28 billion based on 2010 operating results.

(3) Approximately $21 billion in charges taken in 2010 as mentioned above should suffice to cover all clean-up and most other costs in the foreseeable future as approximately $8.2 billion funding remains. Most of the recovery and remediation work has been complete.

(4) Plans to improve capital efficiency could enhance the Company’s already strong ability to generate cash flow. It intends to focus more on the profitable upstream operations with numerous growth projects, and to sell about half of its U.S. refining capacity, principally the highly complex Texas City refinery and the less integrated west coast value chain, including the Carson refinery, by the end of 2012. The Toledo refinery will be upgraded to handle the Canadian heavy crude in partnership with Husky Energy Inc. (Husky) as its first foray back to the oil sands, with the Whiting refinery modernized by late-2012 to mid-2013. Post 2013, BP is expected to be the smallest downstream operator among the six multinationals with about two million b/d of refining capacity and about one-third in the United States (USA - 50% in 2010). The proposed refinery sales could be more protracted, depending on market conditions.

(5) The Company has also taken steps to improve safety and risk management, particularly operational safety and plant reliability, by restructuring its upstream segment and setting up a new oversight group supported by revised staff compensation programs.

BP’s major challenges include the following: (1) Substantial uncertainties remain, relating to liabilities associated with the Spill, although most have been substantially provided for, as mentioned above. (2) Heightened political risk exists with BP’s increased exposure in Russia through the recent Rosneft alliance (Rosneft Transaction) as mentioned below. The transaction has been temporarily blocked by the Company’s existing partner in TNK-BP, two years after the debacle on governance issues for this joint venture. (3) The Company’s ability to improve its safety record has yet to be proven, after a string of significant accidents, namely the recent Spill, the Texas City refinery blow-up and the Alaska Pipeline leak in 2005. DBRS continues to expect the Company to manage the safety and compliance issues as well as its political risk profile in an appropriate manner for the credit rating through portfolio re-balancing, as evidenced in the past.

The refocused BP with a lower production/reserve base (estimated at 5% and 9%, respectively) and a much smaller downstream operation, yet a more conservative financial profile by year-end 2011, should support the current credit rating, barring any unforeseen circumstances. Oil sands joint ventures with Husky in 2008 and recently with Value Creation demonstrate the Company’s refocus on growth developments in countries within the Organization for Economic Cooperation and Development (OECD), partly mitigating increased political risk associated with its increased Russian exposure. The OECD accounts for about 68% of BP’s fixed assets with about 42% in the USA and 20% in Europe. It also maintains one of the lowest cost bases among its peers (reserve replacement cost of $11.04/boe) on a three-year average basis, with about 93% of all reserve additions achieved through the drill bit over the last three years.

The Company projects lower production (about 10%) to approximately 3.4 million boe/d in 2011 as a result of substantial disposals, uncertainties on restart at the GOM and higher turnaround activities to improve safety (down 200,000 boe/d). Long-term growth is underscored by 32 project start-ups, particularly in the North Sea (N. Sea), Angola, Azerbaijan, Canada, Egypt and the GOM, which are anticipated to add about 1,000,000 boe/d by 2016, or about 26 % of 2010 volumes. BP remains focused on deepwater, natural gas and giant field developments together with its new initiative to foster new partnerships with national oil companies (NOCs). Longer-term prospects are underscored by exploration efforts in new areas, such as Brazil (through the recent $7 billion Devon Energy asset purchase), the South China Sea, deepwater Australia and in the Arctic through the Rosneft Transaction. The latter transaction through share swaps is valued at approximately $7.8 billion, which would give BP unprecedented access to the Arctic reserves. The joint venture with Reliance Industries (Reliance Transaction) should add to BP’s Asian exposure, benefitting from the region’s growing energy demand, alleviating over time slower growth expected for TNK-BP. Significant growth potential would emanate from North Africa, the Middle East, Brazil and Canada. In the meantime, BP has increased its holdings in North American shale gas and Canadian heavy oil and will step up exploration efforts over the next few years. Exploration success was seen in Angola, Egypt, Azerbaijan and the GOM in the last decade.

Notes:
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.