DBRS Morningstar Confirms BP p.l.c.’s Issuer Rating at "A"; Maintains Stable Trend

DBRS Ratings Limited (DBRS Morningstar) confirmed its Issuer Rating on BP p.l.c. (BP or the Company) at "A". The trend on the rating remains Stable.

KEY RATING CONSIDERATIONS
The rating confirmation reflects BP’s strong business profile underpinned by its large-scale global presence with well-diversified, vertically integrated operations and a significant production base of 2.3 million barrels of oil equivalent per day (boe/d) in 2022. BP also benefits from a strong liquidity position and a low-cost structure compared with its peers (USD 6.07/boe in 2022), enabling it to withstand any significant market volatility.

The rating confirmation also considers the expected drop in commodity prices and realisations for 2023 through 2025, as compared with the highly elevated 2022 levels. DBRS Morningstar also notes the Company's continued investment in a capital expenditure programme that supports its existing O&G business and transition growth strategy, although there could be potential execution risks associated with the latter. Further, while BP has made progress in recent years in reducing its reported net debt and strengthening its balance sheet, the total gross debt held by BP remains relatively high. The rating also considers general political risks associated with the Company's global operations. The Stable trend underscores DBRS Morningstar's expectation that the Company's key credit metrics will remain relatively stable through 2023 to support the rating.

RATING DRIVERS
Based on DBRS Morningstar’s base-case oil price assumptions of USD 68/barrel (bbl) in 2023 and USD 63/bbl in 2024 and 2025 – a marked decrease from the Dated Brent average of USD 101.32/bbl in 2022 – near to medium term earnings and cash flow are expected to be comparable with 2021. The DBRS Morningstar forecast also incorporates capital expenditures (capex), dividends, and share buybacks broadly in line with BP's public guidance. Based on these considerations, DBRS Morningstar expects BP's credit metrics to be weaker in 2023 as compared with the 2022 levels, and to subsequently moderately improve directionally through 2025. DBRS Morningstar may consider a positive rating action if, all else being equal, DBRS Morningstar-adjusted net debt to cash flow remains below 1.5x on a sustained basis. DBRS Morningstar may take a negative rating action if BP's credit metrics drop below DBRS Morningstar's base case expectations and/or if BP's business transition faces a high level of execution risk associated with its net-zero carbon strategy, which may have a material impact on the resilience of the business.

RATING RATIONALE
Following Russia's invasion of Ukraine in February 2022, BP announced the divestment of its 19.75% shareholding of the Russian government-controlled oil producer, Rosneft. The divestment resulted in significant non-cash and non-recurring charges of approximately USD 24.0 billion, resulting in a reported loss attributable to BP shareholders in 2022 of USD 2.5 billion, compared with a profit of USD 7.6 billion in 2021. However, considering the non-recurring nature of the event and other non-underlying items, adjusted EBITDA, as calculated by DBRS Morningstar, increased to USD 58.1 billion in 2022 from USD 36.2 billion in 2021. While the exit from the Russian business resulted in almost a 60% decrease in BP's total reported reserves (including equity-accounted entities), the exit itself is not expected to materially affect future earnings as Rosneft was an equity-accounted entity for which BP did not have control and dividends received from the investment were limited to USD 640 million in 2021 (2022: nil).

Based on its base-case Brent oil price assumptions, DBRS Morningstar expects BP to generate adequate free cash flow (FCF: cash flow after capex and dividends) to cover organic capital capex and cash dividends. As part of its balance sheet-strengthening strategy, BP plans to allocate 60% of its FCF toward share buybacks and the remaining 40% toward deleveraging. In Q1 2023, total net financial debt, as calculated by DBRS Morningstar, was USD 28.3 billion, which remains within BP's target net debt of USD 35 billion. DBRS Morningstar also notes that as of Q4 2022 BP reported that it has delivered on its cost savings targets, relative to 2019, approximately one-year ahead of schedule. The Company's total reported liquidity as at Q1 2023 is USD 42 billion, including cash & cash equivalents of approximately USD 30 billion.

BP has continued to progress in its transformation to become a more integrated energy company while also continuing to maintain its oil and gas (O&G) production. BP started up two new deepwater oil projects in the Gulf of Mexico in 2022 and April 2023, as well as a new liquid natural gas (LNG) project in Trinidad during 2022. In the Company's low-carbon segment, BP's installed renewable capacity was 2.2 GW in 2022 (2021: 1.9 GW) and its renewables pipeline grew to 43.0 GW (2021: 27.5 GW). BP has reported that it will increase investment in both its transition growth plan and current O&G system with an additional USD 8 billion to be invested in each division by 2030, as compared to prior guidance. Overall, BP expects to invest USD 14 billion to USD 18 billion per year by 2030 in total capital expenditure, of which 40% to 50% will be allocated across transition growth engines including bioenergy, convenience and EV charging, hydrogen, and renewables and power, with the balance to be invested in upstream O&G, refining, retail fuels, and other businesses.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental (E) Factors
DBRS Morningstar considered carbon and greenhouse gas (GHG) costs as a relevant environmental factor for BP. This factor is relevant because of the legislative environmental regulations in the UK targeting the reduction of GHG emissions, which limit the growth potential and add costs for all O&G companies in the UK.

BP is in a stronger position to face the challenges associated with reducing GHG emissions, given that it has already taken steps to invest in low-carbon business like renewables and bioenergy. In addition to its target to deleverage and strengthen its balance sheet, BP has a very strong liquidity to support its energy transition path.

There were no Social or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the “DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings” (17 May 2022) at; https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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

DBRS Morningstar applied the following principal methodology:
“Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries” (31 August 2022); https://www.dbrsmorningstar.com/research/402196/global-methodology-for-rating-companies-in-the-oil-and-gas-and-oilfield-services-industries.

The following methodologies have also been applied:
“DBRS Morningstar Global Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers” (20 October 2022); https://www.dbrsmorningstar.com/research/404248/dbrs-morningstar-global-criteria-preferred-share-and-hybrid-security-criteria-for-corporate-issuers.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

The primary sources of information used for this rating include publicly available information, namely BP’s 2022 Annual Report and Form 20-F 2022, BP’s Group results for the first quarter 2023, BP’s first quarter 2023 results group Databook, publicly available Company presentations, and other information publicly available on BP’s website. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/416470.

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

Lead Analyst: Chloe Blais, Assistant Vice President
Rating Committee Chair: Victor Vallance, Managing Director
Initial Rating Date: 30 April 2001
Last Rating Date: 28 June 2022

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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