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

DBRS Limited (DBRS) has today confirmed the Issuer Rating of BP p.l.c. (BP or the Company) at “A” with a Negative trend. BP is one of the world’s largest oil and gas companies with (1) a sizable footprint in a number of countries around the globe and (2) oil and natural gas production from several key hydrocarbon basins. The Company has highly integrated operations that help mitigate the risk of low commodity prices. BP has ample liquidity and continues to focus on reducing operating expenses and capturing efficiencies. With a diverse asset base, the Company has the capacity to deploy capital in areas that offer superior long-term returns. DBRS notes that approximately one-third of the Company’s production is from Production Sharing Agreements that are less sensitive to the price of oil. BP also has an extensive portfolio of conventional natural gas and liquefied natural gas projects, which adds diversification to the Company’s production mix. The Negative trend reflects the Company’s rising financial leverage beyond an “A” rating because of (1) a contraction in cash flow as a result of weak prices and (2) a rising level of indebtedness due to the incurrence of free cash flow (cash flow less capital spending and dividends) deficits.

DBRS expects BP to manage the challenging operating environment by (1) preserving liquidity (2) reducing capital expenditure (capex) spending and (3) maintaining reliable and efficient operations. BP’s capex of under $17 billion for 2016 is 9% less than in 2015, and about 26% less than in 2014. However, DBRS expects BP to incur a free cash flow deficit of more than $6 billion in 2016. Planned divestitures for the year, less claims resulting from the Gulf of Mexico oil spill in 2010, are unlikely to offset the free cash flow deficit. In 2017, the Company anticipates paring capex further to a range of $15 billion to $17 billion. DBRS notes at a $50-$55/barrel (bbl) Brent Oil price in 2017, BP is expected to reach free cash flow neutrality. The Company’s financial performance should improve in 2017, as it ramps up production from a number of higher-margin areas and benefits from lower operating costs and efficiency gains. As a buffer, liquidity (supported by $23.5 billion of cash and cash equivalents) is sufficient to fund cash flow deficits if oil and natural gas prices remain weak for a prolonged period. Should the price of oil stabilize above $50/bbl, DBRS may change the trend to Stable. Conversely, if pricing remains weak and BP’s financial metrics erode further, DBRS may downgrade the Company’s Issuer Rating.

On July 14, 2016, BP announced that significant progress had been made in resolving the outstanding claims for the Gulf of Mexico oil spill and it can now reliably estimate all of its material liabilities connected with the incident. DBRS notes the higher level of certainty on managing future costs and cash outflows associated with the oil spill is credit-positive. The Company anticipates to employ proceeds from divestitures to meet future commitments connected with the spill.

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.

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

The applicable methodology is Rating Companies in the Oil and Gas Industry, which can be found on our website under Methodologies.

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