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 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 about 2.2 million barrels of oil equivalent per day (boe/d) as of Q1 2025 (including equity-accounted entities). However, Morningstar DBRS notes that BP's position within the "A" credit rating category has weakened and has very limited headroom because the Company's 2024 financial performance lagged Morningstar DBRS' expectations and its key credit metrics are weak relative to the credit rating level due to BP's high debt load. As at March 2025, BP's cash flow-to-net debt ratio was 35%.

Notwithstanding, Morningstar DBRS has maintained the Stable trend, which reflects the expected improvement in BP's credit metrics over the medium term on the back of BP's renewed strategy. As announced in the Company's capital markets day, BP intends to prioritise net debt reduction in the period to 2027, supported by a substantial disposal programme. At the same time, the Company has tightened its capital expenditure (capex) guidance and has augmented its cost savings targets, which should support the stabilisation of free cash flows in a lower oil price environment relative to the past two years. While Morningstar DBRS acknowledges potential execution and timing uncertainties related to BP's envisaged USD 20 billion divestment programme, the Stable trend reflects BP's ongoing positive free cash flow generation and flexibility in its capital allocation, which should provide the Company with the capacity to strengthen its balance sheet.

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 notable improvement in BP's earnings and financial metrics, such as its cash flow-to-net debt ratio trending above 60% on a sustainable basis, along with a strengthening of BP's already-strong business risk profile. Conversely, Morningstar DBRS may consider a negative credit rating action if BP's operating performance or credit metrics lag Morningstar DBRS' expectations, such as cash flow-to-net debt remaining constrained below 45% on a persistent basis and/or if BP's divestment and deleveraging strategy does not progress as expected.

EARNINGS OUTLOOK
For 2025, BP has guided its underlying upstream production to be slightly lower than 2024 (2.3 million boe/d), within which Morningstar DBRS expects liquids production to be broadly flat and natural gas to be slightly lower. Thereafter, Morningstar DBRS expects upstream production to remain broadly flat as new projects offset divestments. Morningstar DBRS' commodity price assumptions for the period to 2027 include a noted moderation in oil prices, while natural gas prices are expected to be sustained above 2024 averages. Given BP's balanced mix of liquid and gas production, this should provide some stability to earnings in the forecast period. At the same time, Morningstar DBRS expects that BP's targeted structural cost reduction of USD 4 billion to USD 5 billion (compared with a 2023 base line), will support improved profitability and will more than offset lost profits from the disposal programme (including the expected disposal of Castrol, which generated about USD 1 billion of EBITDA in 2024). In 2024, BP realised USD 750 million of its targeted cost savings. Under these assumptions, Morningstar DBRS expects BP's adjusted EBITDA to decline to less than USD 31 billion in 2025, from USD 32 billion in 2024, and thereafter demonstrate a modest positive trend through to 2027.

Morningstar DBRS' base-case commodity price assumptions are available in its "Crude Spike From Israel-Iran War Likely Short-Lived as Supply Adjusts" commentary published on 17 June 2025 at https://dbrs.morningstar.com/research/456419.

FINANCIAL OUTLOOK
Morningstar DBRS expects that BP's cash flow from operations will benefit from BP's cost savings measures and show a modest positive trend in the forecast period. The Company has tightened its capex guidance to USD 14.5 billion in 2025 and USD 13 billion to USD 15 billion in 2026 and 2027. This is a noted reduction from prior guidance of USD 14 billion to USD 18 billion annually and includes a reallocation of spending with about USD 1.5 billion more to be allocated annually to its oil & gas activities and about USD 5 billion less to be allocated to transition businesses. After capex and the expected continued progression in dividend payments, free cash flow is forecast to remain positive.

BP has announced a new divestment programme with targeted proceeds of USD 20 billion in the period to 2027 (inclusive of its strategic review of its Castrol lubricant business and its aim to bring in a strategic partner for its Lightsource bp onshore renewables business). For 2025, BP has guided expected divestment proceeds of USD 3 billion to 4 billion as part of this programme (of which USD 1.5 billion was completed or supported by signed agreements as of April 2025). The Company has announced its intention to use these proceeds to reduce net debt (as defined by BP) to USD 14 billion to USD 18 billion by the end of 2027 (compared with USD 27 billion as of March 2025), and the Company has stated that it may consider retiring up to 25% of its hybrid bond stack with a potential reduction of up to 10% per year. As of March 2025, hybrid bonds totalled USD 17 billion, which Morningstar DBRS considers as 75% debt in its ratio analysis. The Morningstar DBRS forecast assumes that free cash flow and divestment proceeds will be substantially allocated to strengthening BP's balance sheet, with share buybacks to moderate from prior years in line with the Company's guidance for total shareholder remuneration in the range of 30% to 40% of operating cash flow (as defined by BP). BP's Q1 2025 share buyback announcement was USD 750 million, a noted reduction from USD 1.75 billion in the prior quarter.

CREDIT RATING RATIONALE
Comprehensive Business Risk Assessment (CBRA): AAL
BP's CBRA reflects the Company's very large size, significant geographic diversification, and highly integrated operations with substantial midstream and downstream activities. The Company's average daily production was about 2.2 million boe/d as of Q1 2025 (including equity-accounted entities). BP's long-term production target to 2030 is now guided as broadly flat to or slightly higher than 2024 levels at 2.3 million to 2.5 million boe/d (compared with its prior strategy to reduce production to 2.0 million boe/d by 2030). BP has a balanced split in production, with an approximate 50%/50% mix of liquids and natural gas, which provides diversification benefits. The Company's refinery capacity is over 1.5 million barrels per day with an average capacity utilization of 90%. While BP's net proved reserves decreased in 2024 to 6.2 billion boe from 6.7 billion boe in 2023, Morningstar DBRS expects the Company's reserves to recover over the medium term because of BP's increased investment in upstream operations, augmented exploration efforts, and an ambition to improve its underlying reserve replacement ratio to 100% from 50% in 2024. As of Q1 2025, BP has delivered three of the 10 major projects it intends to start up between 2025 and 2027; these three projects are expected to contribute 100 thousand boe/d of net peak production of the targeted 250 thousand boe/d across all 10 projects. BP's recent tightening of its capex guidance and recalibration of its capital allocation from its transition business to its upstream operations demonstrate increased flexibility in capital spending and is a credit positive in the near-term; however, in the long-term the reduction of spending in transition engines may increase the Company's environmental risk factors.

Comprehensive Financial Risk Assessment (CFRA): BBH
BP's CFRA reflects Morningstar DBRS' expectation that the Company will substantially allocate its free cash flow and divestment proceeds to reduce net debt and strengthen the balance sheet. Morningstar DBRS forecasts that BP's credit metrics will show notable improvement over the medium term, including cash flow-to-net debt trending above 50% by 2027. Notwithstanding the expected improvement in credit metrics, Morningstar DBRS notes that the CFRA remains weak for the credit rating level, and an adverse deviation from the Morningstar DBRS forecast is likely to result in a negative credit rating action.

For the purpose of calculating key financial ratios, BP's Morningstar DBRS-adjusted net debt is net of unrestricted cash exceeding USD 10 billion and includes 75% of hybrid bonds.

Intrinsic Assessment: A
The Intrinsic Assessment (IA) is based on the aforementioned CFRA and CBRA. Taking into consideration peer comparisons, among other factors, Morningstar DBRS places the IA in the middle of the Intrinsic Assessment Range.

Additional considerations: None
The Issuer Rating includes no further negative or positive adjustments due to additional considerations.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Environmental (E) Factors
The following Environmental factor had a relevant effect on the credit analysis:
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 increased environmental regulations in all jurisdictions in which it operates, which may limit its growth potential and add operational costs. The Company has recently announced a reduced level of investment in its transition businesses and has moderated its 2030 emissions targets. Under the Company's updated framework, it aims to reach net zero emissions by 2050 for scope 1 and 2 emissions within BP's operational control, with interim targets of 20% by 2025 and of 45% to 50% by 2030 (was 50%), both against a 2019 baseline. BP is also targeting a reduction of the average lifecycle carbon intensity of the energy products it sells of 5% by 2025 and of 8% to 10% by 2030 (was 15% to 20%). While BP's revised strategy may increase its transition risks over the long term, Morningstar DBRS notes that the Company's significant geographic diversification and financial flexibility provide mitigation and support as it navigates the energy transition. The relevant Environmental factor was considered in BP's CBRA.

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 be approximately USD 1.2 billion (pre-tax) per year over the next nine 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 Factors in Credit Ratings (16 May 2025) https://dbrs.morningstar.com/research/454196

Further details on the Issuer's Corporate Intrinsic Assessment Framework can be found at https://dbrs.morningstar.com/research/456901.

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, Oilfield Services, Pipeline and Midstream Energy Industries (6 May 2025) - https://dbrs.morningstar.com/research/453396

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate (3 February 2025) - https://dbrs.morningstar.com/research/447186 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 Global Corporate Criteria (3 February 2025) - https://dbrs.morningstar.com/research/447186
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (16 May 2025) -https://dbrs.morningstar.com/research/454196

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 2024 Annual Report and Form 20-F; the Company's February 2025 Capital Markets Day Presentation; the Company's Q4 2024 results, presentation and related enclosures; BP's Q1 2025 results, presentation and related enclosures; the Company's 2024 Sustainability Report and ESG Datasheet; 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/456900

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

Lead Analyst: Chloe Blais, Vice President
Rating Committee Chair: Victor Vallance, Managing Director
Initial Rating Date: 1 May 2001
Last Rating Date: 26 June 2024

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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