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Rating Action:

Moody's changes BP's outlook to stable, affirms A1 ratings

08 Oct 2018

NOTE: On June 20, 2019, the press release was corrected as follows: In the list of the affirmations for BP p.l.c., removed "Backed Senior Secured Revenue Bonds supported by BP p.l.c." Revised release follows.

London, 08 October 2018 -- Moody's Investors Service ("Moody's") has affirmed the A1 issuer rating of oil and gas company BP p.l.c. (BP) and the long term debt ratings of its guaranteed subsidiaries. Concurrently, Moody's affirmed its Prime-1 commercial paper ratings of BP Capital Markets plc and BP Corporation North America, Inc. The outlook on all ratings was changed to stable from positive.

"Our decision to stabilise the outlook on BP's ratings, despite rising earnings and operating cash flow generation, reflects the increasing shareholder remuneration, which is keeping BP's credit metrics short of our requirements for an Aa3 rating," said Sven Reinke, a Moody's Senior Vice President.

At the same time, Moody's affirmed the A2 issuer rating of BP's wholly-owned subsidiary, BP Corporation North America, Inc. (BPCNAI).

A full list of affected ratings can be found at the end of this Press Release.

RATINGS RATIONALE

The stabilisation of the outlook on BP's ratings reflects Moody's expectations that the company's leverage and cash flow metrics are unlikely to meet the requirements for an upgrade to Aa3 previously set by the rating agency. Despite improved EBITDA and operating cash flow generation in recent quarters supported by rising oil prices, growing upstream production and materially reduced operating costs, Moody's expects that the company's credit metrics will not improve materially over the next 12-18 months. Rising shareholder remuneration and the recently announced $10.5 billion acquisition of BHP Billiton Limited's (BHP, A3 Positive) US unconventional oil and gas assets will offset BP's improved operating performance.

The rating agency expects BP's net adjusted debt/EBITDA metric to remain close to 2.0x and that its RCF/net debt ratio will not increase solidly above 30% in 2018-19. Accordingly, BP's financial metrics should remain moderately behind its Aa rated peers.

Since Q4 2017, BP offsets the scrip dividend option with share buybacks thereby effectively removing the positive cash flow impact from the scrip option. This will increase the dividend and related share-buyback cash outflow to around $8.0 billion in 2018 compared with $6.2 billion in 2017. In addition, BP has recently increased its quarterly dividend by 2.5%.

BP also announced in July 2018 to return $5-6 billion to shareholders via a share buyback programme. While the share buyback programme shall be fully funded with asset disposal proceeds thereby not increasing net debt, Moody's believes that it will result in an EBITDA dilution and is therefore credit negative.

BP also announced in July 2018, that it agreed to acquire US oil and gas assets from BHP for $10.5 billion. BP intends to finance 50% of the purchase price through equity issuance. While the impact of the $5.25 billion cash outflow for the other 50% of the acquisition price on BP's credit metrics is relatively small, it will further delay an improvement of the company's credit metrics towards a level commensurate with an Aa3 rating.

BP's acquisition and shareholder remuneration decisions have removed positive rating pressure but they do not put the A1 ratings under negative pressure owing to the company's improving operating performance. BP's Moody's adjusted EBITDA increased by 12.6% to $35.1 billion in LTM June 2018 compared with $31.2 billion in 2017 and its Funds from Operations (FFO) rose by 7.2% to $26.9 billion compared with $25.1 billion in 2017. BP's upstream segment performed strongly supported by rising oil prices but also growing production, which increased by 5.2% in H1 2018 compared with H1 2017. BP's reported replacement cost profit before interest and tax at the upstream division increased to $6.7 billion in H1 2018 compared with $2.1 billion in H1 2017 thereby lifting the group-wide profit to $10.1 billion, more than doubling the $4.9 billion generated in H1 2017.

BP's A1 ratings are underpinned by its large and diversified reserves and production base, boosted by the 19.75% investment in PJSC Oil Company Rosneft (Baa3 stable); "value over volume" growth strategy in its dominant upstream operations; as well as the benefits of its integrated business model, with profitable downstream operations. BP's business profile compares well on scale, diversification and reserve provisions with the business profile assessments of its Aa-rated peers.

RATIONALE FOR STABLE OUTLOOK

The stable outlook recognises BP's solid position in the A1 rating category. Rising shareholder remuneration and acquisition related cash outflow is compensated by improved EBITDA and operating cash flow generation. The stable outlook is also underpinned by the company's stated commitment to keep a strong balance sheet as expressed by a reported gearing target of 20-30%. While BP's strong business profile could justify a higher rating, its financial policy will likely prevent the company from reaching the financial metrics required for a higher rating.

WHAT COULD LEAD TO AN UPGRADE/DOWNGRADE

An upgrade of the A1 ratings would require a sustained improvement in cash flow generation that would allow BP to maintain FCF neutrality after capital investment and dividends. An upgrade of the ratings would require lower leverage, with RCF/net debt solidly positioned above 30%.

While not anticipated at this stage, a re-leveraging of the balance sheet, with RCF/net debt falling sustainably to mid-20s level could lead to negative rating pressure.

LIST OF AFFECTED RATINGS

..Issuer: Atlantic Richfield Company

Affirmations:

....Senior Unsecured Regular Bond/Debenture, Affirmed A1

....Backed Senior Unsecured Revenue Bonds supported by Atlantic Richfield Company, Affirmed A1

....Backed Senior Unsecured Revenue Bonds supported by Atlantic Richfield Company, Affirmed P-1

....Backed Senior Unsecured Revenue Bonds supported by Atlantic Richfield Company and Arco Pipeline Company, Affirmed A1

Outlook Actions:

....Outlook, Changed To Stable From Positive

..Issuer: BP AMI Leasing, Inc.

Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A1

Outlook Actions:

....Outlook, Changed To Stable From Positive

..Issuer: BP Capital Markets America Inc

Affirmations:

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A1

....Backed Senior Unsecured Shelf, Affirmed (P)A1

Outlook Actions:

....Outlook, Changed To Stable From Positive

..Issuer: BP Capital Markets plc

Affirmations:

....Backed Senior Unsecured Conv./Exch. Bond/Debenture, Affirmed A1

....Backed Senior Unsecured Commercial Paper, Affirmed P-1

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A1

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A1

....Backed Senior Unsecured Shelf, Affirmed (P)A1

Outlook Actions:

....Outlook, Changed To Stable From Positive

..Issuer: BP Corporation North America, Inc.

Affirmations:

.... Issuer Rating, Affirmed A2

....Backed Senior Unsecured Commercial Paper, Affirmed P-1

Outlook Actions:

....Outlook, Changed To Stable From Positive

..Issuer: BP p.l.c.

Affirmations:

....Issuer Rating, Affirmed A1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c., Affirmed VMIG 1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c., Affirmed A1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c., Affirmed P-1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c. and Amoco Production Company, Affirmed A1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c. and Amoco Production Company, Affirmed P-1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c. and BP Amoco Chemical Company, Affirmed VMIG 1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c. and BP Amoco Chemical Company, Affirmed A1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c. and BP Products North America Inc., Affirmed A1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c. and BP Products North America Inc., Affirmed VMIG 1

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c. and BP Products North America Inc., Affirmed P-1

Outlook Actions:

....Outlook, Changed To Stable From Positive

..Issuer: Standard Oil Company

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A1

Outlook Actions:

....Outlook, Changed To Stable From Positive

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

BP p.l.c. is one of the largest public integrated oil and gas companies globally, with revenue of $271 billion in the 12 months ended June 2018 and a current market capitalization of around $165 billion. The company is an upstream-focused vertically integrated group with a sizeable downstream presence. BP's main operations are located in North America, Europe, Asia and parts of Africa (Angola, Egypt), and it also holds a large investment in Russia through its 19.75% stake in PJSC Oil Company Rosneft (Rosneft, Baa3 stable).

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Sven Reinke
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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