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

DBRS Ratings Limited (DBRS) confirmed the Issuer Rating of BP p.l.c. (BP or the Company) at “A” with a Stable trend. The rating confirmation reflects the Company’s strong business risk profile underpinned by its (1) large size and scale; (2) diversified vertically integrated operations; (3) long reserve life with low base decline rates; (4) low-cost structure; and (5) ability to withstand market volatility. Although BP’s 2018 year-end results saw improvements from both downstream and upstream operations as a result of higher production and oil prices in the upstream segment and improved margins in the downstream segment, the rating remains constrained by the Company’s comparatively weaker financial risk profile. The Stable trend underscores BP’s successful execution of its plan to achieve a more balanced production portfolio, clarity on future liabilities connected with the Gulf of Mexico oil spill and DBRS’s outlook for oil and gas (O&G) prices. Under DBRS’s base-case Brent oil price assumption of $60/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 few years is in line with its five-year strategic plan made in 2017 and its targets for 2021. BP continues to achieve greater efficiencies with total reported production 2.4% higher than 2017 due to new major project ramp-ups and improved plant reliability at its facilities. The Company’s reserve replacement ratio in 2018 was 100.4% while its three-year average reserve replacement costs ($9.90/bbl) improved in 2018. BP also commissioned six major projects in 2018 in Australia, Azerbaijan, Egypt, Russia, the UK and the US. As at 30 June 2019, the Company already delivered four of the five major projects planned for 2019 including the Culzean project in the North Sea. BP’s management indicated a breakeven price (Brent oil price at which capex and cash dividends are fully funded) of $50/bbl in 2018. DBRS expects the breakeven price to improve going forward.

Notwithstanding the above improvements, BP’s net debt-to-capital ratio (gearing) increased to 31.1% at 30 June 2019 (vs. 27.7% at 30 June 2018), outside the Company’s target band of 20% to 30%. The increase was driven by the Company’s use of cash at hand to make payments of $2.1 billion in relation to the Gulf of Mexico oil spill and $3.5 billion in connection with acquisition of assets from BHP Billiton Ltd (BHP) concluded in 2018. BP expects gearing to come back in line with its target by 2020, as proceeds from its planned divestments are realised. At H1 2019, proceeds from divestments totalled $0.7 billion with more than $10 billion expected by the end of 2020. BP recently announced that it will also be divesting of its entire business in Alaska to Hilcorp Energy Co. for $5.6 billion.

While improving, BP’s key lease-adjusted credit metrics for the last 12 months ended June 30, 2019 (net debt-to-cash flow: 2.61 times (x); debt-to capital: 44.4% and earnings before interest and taxes (EBIT) interest coverage: 6.60x) remain outside the range for the current rating. DBRS expects the Company’s key credit metrics to improve over the next 12 months from higher production but are unlikely to trigger a positive rating action. However, 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. DBRS believes that liquidity (supported by $20.7 billion of cash & cash equivalents) is sufficient to fund possible cash flow deficits in event of lower O&G prices.

Notes:
All figures are in US 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 (August 2019). This can be found at: http://www.dbrs.com/about/methodologies.

The primary sources of information used for this rating include publicly available information from the rated entity’s website. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Andrew Lin, Managing Director
Initial Rating Date: 1 May 2001
Last Rating Date: 21 September 2018

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