Morningstar DBRS Confirms BP p.l.c.'s Issuer Rating at "A", Stable Trend

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

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmation remains supported by BP's strong business profile underpinned by its large-scale global presence with well-diversified, vertically integrated operations and a significant production base of about 2.3 million barrels of oil equivalent per day (boe/d) in 2023 (including equity-accounted entities). Despite the Company's inherently strong credit profile, its position within the "A" credit rating will likely weaken moderately over the coming 12 to 18 months. This is because Morningstar DBRS considers BP's substantial shareholder distributions, which include a progressive dividend of $4.8 billion in 2023 and a stated target of at least $14.0 billion in share buybacks by 2025 compared with $7.9 billion paid out in 2023. Morningstar DBRS believes that these large outlays to shareholders will, to an extent, limit the Company's free cash flow available for debt reduction and likely result in weaker key financial metrics compared with current levels as Morningstar DBRS expects commodity prices and BP's earnings to decrease over the forecast period. Notwithstanding the increased emphasis on shareholder distributions, Morningstar DBRS forecasts that BP's key credit metrics will remain supportive of the credit rating, resulting in a Stable trend.

CREDIT RATING DRIVERS
Morningstar DBRS does not consider a positive credit rating action to be likely in the near to medium term as this would require further strengthening in BP's already-strong business risk profile and/or a material and sustainable improvement in the Company's key financial metrics, such as a net debt-to-cash flow ratio of less than 1.5 times (x) and an EBIT-to-interest ratio higher than 10.0x, all else equal. Conversely, Morningstar DBRS may consider a negative credit rating action if BP's operating performance and/or credit metrics materially weaken outside Morningstar DBRS' base-case expectations on a sustained basis, such as a net debt-to-cash flow ratio trending toward 2.5x and/or an EBIT-to-interest ratio trending toward 4.0x, all else equal.

EARNINGS OUTLOOK
Morningstar DBRS' forecast considers BP's medium-term target of keeping its oil and gas (O&G) production relatively stable at around 2.3 million boe/d as well as its expectation that 2024 production will be slightly higher compared with 2023. Stabilised production will be supported, in part, by four new major O&G production projects start-ups during 2023, which the Company expects will contribute more than 50% of its target of approximately 200,000 boe/d from 10 new major projects by 2025. Morningstar DBRS anticipates that hydrocarbon prices will decrease from current levels, resulting in a decrease in BP's revenue and earnings in the forecast period. However, gains in BP's customer segment (which should benefit from synergies following its 2023 acquisition of TravelCenters of America and growth in electric vehicle (EV) charging), increased EBITDA generation from the Company's energy transition activities, and a recently announced cost-reduction programme to save at least $2 billion in costs by 2026 will likely partially offset reduced upstream earnings. As such, Morningstar DBRS forecasts that BP's EBITDA will reduce to a range of about $35 billion to $38 billion in the forecast period compared with $39 billion in 2023.

FINANCIAL OUTLOOK
Morningstar DBRS forecasts that BP's cash flow from operations will track EBITDA and remain relatively stable during the forecast period at around $28 billion to $30 billion compared with $34 billion in 2023. In line with the Company's guidance, Morningstar DBRS expects annual capital expenditure (capex) of $16.0 billion, continued progressive growth in dividends, and divestment proceeds of around $2.0 billion to 2.5 billion per annum (p.a.). BP announced $3.50 billion in share buybacks for H1 2024 ($1.75 billion of which was completed in Q1 2024), which forms part of its plan to complete at least $14.0 billion in share buybacks by 2025 (based on the Company's assessment of current market conditions). Morningstar DBRS forecasts that BP's free cash flow (FCF) generation will be sufficient to substantially cover share buybacks of around $7.0 billion p.a., in line with BP's guidance. However, if market conditions become unfavourable, Morningstar DBRS expects that BP would adjust these payouts as per its stated priority of maintaining balance sheet strength. In the forecast period to 2026, Morningstar DBRS anticipates that BP's key credit metrics will weaken from current levels but remain supportive of the current credit rating, including a net debt-to-cash flow ratio of less than 2.0x, an EBIT-to-interest ratio higher than 5.0x, and a net debt-to-capital ratio of less than 45%.

CREDIT RATING RATIONALE
In recent guidance, BP revised its energy transition ambitions, including a more gradual approach to its future reductions in hydrocarbon production as per its updated plan to maintain production at 2.3 million boe/d to 2025 and then reduce production to 2.0 million boe/d by 2030. In the same period, BP will endeavour to grow its transition growth engines, which include bioenergy, EV charging, hydrogen, and renewables and power. In its Q1 2024 remarks, BP clarified that it will make investment decisions based on its internal return hurdles and not strictly based on production volumes, which Morningstar DBRS believes could result in the Company pushing out its lower production target over time. BP's O&G production remained relatively stable at 2.27 million boe/d in 2023 compared with 2.40 million boe/d in 2022, and marginally increased to 2.34 million boe/d as at Q1 2024. At year-end 2023, BP's net proved reserves were 6.7 billion boe compared with 7.1 billion boe in 2022.

BP continues to benefit from efficient operations with a 2023 upstream unit production cost of $5.78/boe compared with $6.07/boe in 2022, which is within its medium-term target of $6.00/boe. To maintain its cost base in the face of inflation, BP announced a new cost-reduction programme to save $2 billion in costs by 2026. Morningstar DBRS views this cost-savings programme and BP's ongoing investment in its downstream and low-carbon operations as beneficial because these channels should provide incremental earnings and partially offset the lower expected hydrocarbon realisations over the forecast period.

While BP's ongoing commitment to sizeable share buybacks may limit its cash flow available for debt reduction, Morningstar DBRS notes that the Company's FCF generation (after dividends, capex, and working capital) should remain positive and sufficient to substantially cover its announced share buyback target. Morningstar DBRS also considers BP's stated financial priority of maintaining strong credit metrics and its liquidity position (including unrestricted cash exceeding $26 billion and undrawn committed credit facilities of $12 billion as at Q1 2024) as mitigating factors to these large, planned cash distributions.

Morningstar DBRS' base-case commodity price assumptions are available in its "Record-High Temperatures Boost Power Demand but Ample Gas Inventories Prevent a Bigger Jump in Prices" commentary, published on 21 June 2024 at https://dbrs.morningstar.com/research/434798.

BP's net debt, as calculated by Morningstar DBRS, is net of unrestricted cash exceeding $10 billion. Morningstar DBRS adjusted the Company's net debt to include a portion of hybrid instruments.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
The Carbon and Greenhouse Gas (GHG) Costs Environmental factor had a relevant effect on the credit analysis of BP. The Company is subject to risks and uncertainties associated with the ever-increasing environmental regulations and legislation in the regions in which it operates. These regulations target the reduction of GHG emissions, limit the growth potential, and add costs for all O&G companies, including BP. The Company is well equipped to face these potential regulatory impacts because of its progress toward its energy transition strategy (such as its investments in low-carbon activities like renewables and bioenergy), its considerable geographic and operational diversification, and its substantial financial resources.

In 2010, a BP-operated rig exploded in the Gulf of Mexico and caused a substantial oil spill. The ongoing cash payments due under the related 2016 settlement agreement are expected to remain in the range of $1.0 billion to $1.2 billion (pre-tax) per year over the next 10 years, which BP provisioned for in its financial statements and which Morningstar DBRS considered in its forecast.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of BP, the BRA factors were considered in the order of importance contemplated in the methodology.

(B) Weighting of FRA Factors
In the analysis of BP, the FRA factors were considered in the order of importance contemplated in the methodology.

(C) Weighting of the BRA and the FRA
In the analysis of BP, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology: Global Methodology for Rating Companies in the Oil and Gas and Oilfield Services Industries (15 April 2024), https://dbrs.morningstar.com/research/431177.

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (15 April 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024), https://dbrs.morningstar.com/research/427030
-- Morningstar DBRS Global Corporate Criteria (15 April 2024), https://dbrs.morningstar.com/research/431186

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

A description of how Morningstar DBRS analyses corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

The primary sources of information used for this credit rating include BP's 2023 Annual Report and Form 20-F; the Company's Q4 2023 results, presentation, and related enclosures; BP's Q1 2024 results, presentation, and related enclosures; the Company's 2023 Sustainability Report and ESG Factsheet; and other public information available on BP's website. Morningstar DBRS considers the information available to it for the purposes of providing this credit 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

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS 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 credit rating assumptions can be found at: https://dbrs.morningstar.com/research/435044/.

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

Lead Analyst: Chloe Blais, Assistant Vice President
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: 1 May 2001
Last Rating Date: 27 June 2023

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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