DBRS Morningstar Comments on BP p.l.c.’s Divestment of Rosneft

DBRS Limited (DBRS Morningstar) notes that on 27 February 2022 BP p.l.c. (BP or the Company, rated "A" with a Stable trend by DBRS Morningstar) announced that it is exiting its 19.75% shareholding interest in Russian government-controlled oil producer, Rosneft. This announcement comes in response to Russia’s invasion of Ukraine.

As a result, BP will stop treating its interest in Rosneft as an equity investment and instead treat it as a financial asset measured at fair value. BP will stop reporting Rosneft as a separate segment from the first quarter of 2022 and will no longer recognise its share in Rosneft’s net income, production, and reserves. The divestment of Rosneft is expected to result in potential non-cash charges of approximately $25 billion, including Rosneft’s $14 billion estimated carrying value and $11 billion for foreign exchange losses which have accumulated since 2013.

Although modestly negative, DBRS Morningstar does not consider the divestment of Rosneft to be sufficiently material to negatively affect the Company’s rating. Despite the divestment, BP’s business risk profile remains strong and is underpinned by (1) a global presence with well-diversified, vertically integrated operations, large size and scale with a significant production base (2.21 million barrels of oil equivalent per day and refining capacity of 1.69 million barrels per day); (2) low-cost structure compared with peers; and (3) strong liquidity position enabling it to withstand market volatility.

While BP reported its share of Rosneft’s oil and gas production (33% of BP’s 2021 production) and reserves (45% of BP’s proved reserves at YE2020), BP did not have access to its underlying production and reserves. BP was only entitled to dividends from Rosneft, which was a relatively small amount (2021: $600 million) compared with BP’s operating cash flow (2021: $23.7 billion). DBRS Morningstar notes that its commodity price assumptions have increased since the last rating review in March 2021. As a result, despite the reduction in dividends from Rosneft, BP’s overall financial risk profile is modestly stronger than at the time of the last review. BP also expects to continue allocating 40% of free cash flow towards net debt reduction. Crude oil prices are currently materially higher than DBRS Morningstar’s base case assumptions and if they remain at or around current levels then net debt reduction in 2022 could exceed DBRS Morningstar’s expectation.

DBRS Morningstar notes that BP’s stake in Rosneft was excluded from its new strategy to reposition the business away from oil and gas activities to become a net-zero carbon company by 2050. Accordingly, the Rosneft divestment removes any ambiguity associated with how the stake in Rosneft would fit in with BP’s net-zero carbon strategy.

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

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