Press Release

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

Energy
September 21, 2018

DBRS Limited (DBRS) confirmed the Issuer Rating of BP p.l.c. (BP or the Company) at “A” with a Stable trend. The rating is anchored by the Company’s strong business risk profile due to its large size, diversified operations that partially mitigate the impact of low commodity prices, long reserve life with low base decline rates and low-cost structure. The rating remains constrained by the Company’s relatively weaker financial risk profile. The Stable trend underscores the improved outlook for oil and gas (O&G) prices, greater clarity on future liabilities connected with the Gulf of Mexico oil spill and DBRS’s opinion that under a base-case Brent oil price assumption of $57/barrel (bbl) in 2019 and 2020, BP should be able to generate adequate cash flow to cover its organic capital expenditure (capex) and cash dividends.

BP’s operating performance over the last year has been in line with the strategic plan laid out in early 2017. BP’s production costs in both the upstream and downstream segments continue to trend lower, with most cost reductions expected to be sustainable as they have been achieved through efficiency gains and process improvements as opposed to price reductions. The Company’s reserve replacement ratio remained strong (144%) and reserve replacement costs ($12.11/bbl) improved in 2017. BP commissioned seven major projects in 2017 on schedule and within budget and plans to commission an additional six major projects (three already commissioned in the first half of 2018 (H1 2018)) in 2018. On full ramp-up, the new projects are expected to generate higher operating cash margins and incur lower ongoing capital costs as compared with the Company’s base portfolio. BP had a breakeven price (Brent oil price at which capex and cash dividends are fully funded) of $54/bbl in 2017. DBRS expects the continued reduction in operating costs and production from higher-margin projects to improve the breakeven price to approximately $50/bbl in 2018, despite the recent increase in dividends.

BP’s gross and net debt levels increased through the downturn, and the Company’s net debt-to-capital ratio (gearing) of 27.3% at June 30, 2018, is at the higher end of its target band of 20% to 30%; however, the Company expects $3.0 billion in proceeds from planned asset divestments in 2018 ($0.7 billion completed in H1 2018). BP has also agreed to acquire BHP Billiton Ltd’s U.S. onshore petroleum assets for a consideration of $10.5 billion, half of which is to be paid at close (expected in October 2018) with the other half to be paid in six equal installments over a period of six months. BP intends to fund payment at close from existing cash balances and the deferred payments through equity issuances. While improving, BP’s key lease-adjusted credit metrics for the last 12 months ended June 30, 2018 (net debt-to-cash flow*: 2.60 times (x); debt-to capital: 43.4%; and earnings before interest and taxes interest coverage: 6.87x) remain outside the range for the current rating. DBRS expects the Company’s key credit metrics to improve over the next 12 months due to stronger oil prices and higher production but are unlikely to trigger a positive rating action. DBRS notes that there is execution risk associated with the planned divestments and equity issuances, and a material and prolonged reduction in O&G prices may result in an increase in net debt as the Company uses existing cash resources to meet obligations. However, the current rating has some headroom to withstand a period of lower oil prices. DBRS believes that liquidity (supported by $22.2 billion of cash and cash equivalents) is sufficient to fund possible cash flow deficits in the event of lower O&G prices.

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

*Cash balances above $10.0 billion used to reduce gross debt.

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries, which can be found on dbrs.com under Methodologies.

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 under Related Documents or by contacting us at info@dbrs.com.

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

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

The rated entity or its related entities did not participate in the rating process for this rating action. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is an unsolicited credit rating.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

Ratings

  • US = Lead Analyst based in USA
  • CA = Lead Analyst based in Canada
  • EU = Lead Analyst based in EU
  • UK = Lead Analyst based in UK
  • E = EU endorsed
  • U = UK endorsed
  • Unsolicited Participating With Access
  • Unsolicited Participating Without Access
  • Unsolicited Non-participating

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