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Rating Action:

Moody's confirms A2 rating of BP p.l.c; positive outlook

08 Apr 2016

London, 08 April 2016 -- Moody's Investors Service (Moody's) has today confirmed the A2 long-term debt rating of BP p.l.c (BP) and its guaranteed subsidiaries and confirmed its Prime-1 commercial paper rating, concluding an industry-wide review for downgrade announced on January 22, 2016. Moody's is also assigning a positive rating outlook to BP, the same outlook it held before the review was announced.

"Moody's reviewed BP's ratings in the context of a broader energy sector review, which was prompted by our outlook for lower oil and gas prices over the next three years. The confirmation and positive outlook recognize that BP's credit metrics and business profile compare favorably with its major oil peers', and that it faces the same negative free cash flow and upstream return challenges. Still, the July 2015 Macondo settlement reduced legal uncertainties and has helped define the scope of cash flow impacts, providing greater clarity and focus on BP's fundamental performance," said Tom Coleman, Senior Vice President.

In a related action, Moody's upgraded the issuer rating of BP's wholly-owned subsidiary, BP Corporation North America, Inc. (BPCNAI) to A3 from Baa1, also assigning a positive outlook.

List of Affected Ratings

Upgrades:

..Issuer: BP Corporation North America, Inc.

.... Issuer Rating, Upgraded to A3 from Baa1, review for downgrade

Confirmations:

..Issuer: BP p.l.c.

....Issuer Rating, Confirmed at A2

....Backed Senior Unsecured Revenue Bonds supported by BP p.l.c., Confirmed at A2

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

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

....Backed Revenue Bonds supported by BP p.l.c., Confirmed at A2

....Backed Revenue Bonds supported by BP p.l.c., Confirmed at P-1

..Issuer: Atlantic Richfield Company

....Senior Unsecured Regular Bond/Debenture, Confirmed at A2

....Backed Revenue Bonds supported by Atlantic Richfield Company, Confirmed at A2

....Backed Senior Unsecured Revenue Bonds supported by Atlantic Richfield Company, Confirmed at A2

....Backed Senior Unsecured Revenue Bonds supported by Atlantic Richfield Company, Confirmed at VMIG 1

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

..Issuer: BP AMI Leasing, Inc.

....Senior Unsecured Regular Bond/Debenture, Confirmed at A2

..Issuer: BP Capital Markets America Inc

....Senior Unsecured Regular Bond/Debenture, Confirmed at A2

..Issuer: BP Capital Markets plc

....Senior Unsecured Commercial Paper, Confirmed at P-1

....Senior Unsecured Medium-Term Note Program, Confirmed at (P)A2

....Senior Unsecured Medium-Term Note Program, Confirmed at (P)P-1

....Senior Unsecured Regular Bond/Debenture, Confirmed at A2

....Senior Unsecured Shelf, Confirmed at (P)A2

..Issuer: BP Corporation North America, Inc.

....Senior Unsecured Commercial Paper, Confirmed at P-1

..Issuer: BP Finance Plc

.... Issuer Rating, Confirmed at A3

..Issuer: Standard Oil Company

....Senior Unsecured Regular Bond/Debenture, Confirmed at A2

Outlook Actions:

..Issuer: BP p.l.c.

....Outlook, Changed To Positive From Rating Under Review

..Issuer: Atlantic Richfield Company

....Outlook, Changed To Positive From Rating Under Review

..Issuer: BP AMI Leasing, Inc.

....Outlook, Changed To Positive From Rating Under Review

..Issuer: BP Capital Markets America Inc

....Outlook, Changed To Positive From Rating Under Review

..Issuer: BP Capital Markets plc

....Outlook, Changed To Positive From Rating Under Review

..Issuer: BP Corporation North America, Inc.

....Outlook, Changed To Positive From Rating Under Review

..Issuer: BP Finance Plc

....Outlook, Changed To Positive From Rating Under Review

..Issuer: Standard Oil Company

....Outlook, Changed To Positive From Rating Under Review

RATINGS RATIONALE

Moody's expects BP to generate negative free cash flow in 2016 and 2017, based on weak upstream pricing and a flattish production outlook in the area of 2.1 million BOE/day (excluding the equity production of OJSC Oil Company Rosneft, Ba1 RUR down). In addition, downstream results are likely to decline from record levels of 2015, even if refining margins and product demand hold up in 2016. BP's financial metrics will remain relatively weak, with retained cash flow/net debt in the area of 25% in 2016, down from 43% in 2015, and showing only gradual improvement in 2017 and 2018 as cost reductions flow through. At the same time, we view BP's credit metrics as broadly in line with its higher rated peer companies.

To offset weaker prices, BP is focusing on more cuts in operating expenses and layoffs in 2016 and beyond, particularly in higher cost areas such as the US. The company is guiding to capital spending in 2016 at the lower end of USD17-19 billion range, down around 16% from USD20.2 billion in 2015. We expect that capital and exploration spending in a weaker price environment will remain at this lower level into 2017-2018. Cost deflation and a re-evaluation of the upstream investment portfolio should lead to lower unit operating costs, project rephrasing and deferrals, enhancing capital efficiency in 2016-2018.

We note BP remains firmly committed to its dividend, which at USD6.7 billion in 2015 equaled a substantial 37% of funds from operations but the scrip option will help conserve cash flow and reduce the negative cash flow profile.

BP completed its USD10 billion asset sales program for 2014-2015, following on the large divestments of 2011-2013 to cover Macondo-related costs and liabilities. The company is targeting USD3-USD5 billion of asset sales in 2016, primarily in non-core midstream assets. Asset sales in 2017-2018 are likely to reflect more normalized portfolio management, with proceeds likely used to support capital spending and dividends rather than debt reduction.

BP maintains strong liquidity, including USD26.4 billion of cash as of year-end 2015. Its net gearing in 2015 increased to 21.6%, well within its targeted range, or about 37% including Moody's adjustments. While negative cash flow and potential debt reduction are likely to reduce cash balances in the next two years, we expect the company to retain sizeable cash balances for flexibility.

Finally, the confirmation and positive outlook incorporate the USD18.7 billion Macondo agreement from July 2015, which received final court approval on April 4, 2016. The agreement addressed all of the major federal, state and municipal claims and Clean Water Act penalties pending against its wholly-owned subsidiary, BP Exploration and Production Inc. (BPXP), the holder of the Macondo lease and chief defendant in the legal proceedings.

Despite the size of the settlement, the scope and extended payout terms are positive developments, allowing BP to move forward with more certainty around the future cash flow burden. However, other Macondo claims are unresolved and remain an overhang, including the total Plaintiff Steering Committee (PSC) claims above and beyond BP's USD10.3 billion settlement provision; claims by parties that opted out of the original PSC settlement; and the pending MDL 2185 securities class action suit filed in District Court in Houston.

The upgrade of BP Corporation North America Inc.'s issuer rating to A3 reflects the final approval of the Macondo settlement. BPCNAI is an indirect wholly-owned subsidiary of BP. Its operations comprise substantially all of BP's upstream and downstream activities in North America, including BPXP. The settlement terms include a joint and several guarantee by BP and BPCNAI of BPXP's Macondo-related liabilities. The upgrade narrows the previous two notch ratings difference between BPCNAI and BP, which was put in place because of legal uncertainties following the Macondo accident.

Rationale for Positive Outlook

The positive outlook reflects Moody's view that despite persistent earnings weakness expected in 2016-2017, BP's credit metrics compare well with its higher rated peers and its Macondo exposure is diminishing.

What could change the rating -- UP

Further clarity on the course of the Macondo liabilities and continued execution of BP's strategic plan, including the achievement of cash flow neutrality in a lower oil price environment and how the company manages its leverage and large cash position, could lead to an upgrade.

What could change the rating -- DOWN

Sizeable unexpected Macondo liabilities, coupled with more fundamental issues such as setbacks to BP's strategic plan, or substantial erosion in its net leverage position and large cash balances, could lead to a rating downgrade.

The principal methodology used in these ratings was Global Integrated Oil & Gas Industry published in April 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

BP p.l.c ranks as one of the largest global integrated oil companies, with proved reserves as of year-end 2015 of 16.9 billion BOE and average production of 3.3 million BOE/day. In 2015 the company reported USD223 billion in revenues and an asset base of USD279 billion.

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.

Thomas S. Coleman
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
SUBSCRIBERS: 44 20 7772 5454

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

Moody's confirms A2 rating of BP p.l.c; positive outlook
No Related Data.
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