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Global Credit Research - 16 Sep 2010
Approximately USD25 billion of rated debt securities affected
London, 16 September 2010 -- Moody's Investors Service has today confirmed all the ratings of BP p.l.c.,
including the A2/P-1 senior unsecured ratings and the debt obligations
of subsidiaries that are guaranteed by BP. At the same time,
Moody's has also confirmed the A3 issuer rating of BP Finance plc
and the Baa1 issuer rating of BP Corporation North America Inc.
(BPCNAI). The outlook for all ratings is stable.
Today's rating action concludes the review for possible downgrade
of BP's ratings that Moody's initiated on 3 June 2010 in response
to (1) the considerable uncertainty about the scope and magnitude of the
ultimate containment and clean-up costs, as well as (2) litigation
exposure faced by the group following the oil spill in the Gulf of Mexico
caused by the explosion on the Transocean Deepwater Horizon drilling rig.
"The confirmation of BP's ratings with a stable outlook reflects
Moody's expectation that BP will be able to sustain financial metrics
that are commensurate with an A2 rating under a range of likely outcomes
for the ultimate total costs resulting from the oil spill,"
explains Francois Lauras, Vice President -- Senior Credit Officer
in Moody's Corporate Finance Group in London. While Moody's
expects that the company's credit profile will be burdened by litigation
and other costs for a number of years, the rating agency says that
the most likely impacts were already incorporated in the multi-notch
rating downgrades that Moody's implemented following the accident.
Moody's notes that, since the last downgrade in June,
BP has been successful in capping the Macondo well and has taken significant
steps to bolster its liquidity and to line up asset sales.
BP's A2 rating and stable outlook reflect Moody's view that
the spill will ultimately result in very large fines and payments to settle
litigation claims. Increased scrutiny of offshore activities will
also result in higher capital and operating costs. The company
has already taken an after-tax charge of USD22 billion against
its Q2 earnings, and the current ratings acknowledge that ultimate
costs could potentially be substantially higher. Moody's
has assessed the potential impact of scenarios in which (1) fines and
penalties are at the top end of the range stipulated under the Clean Water
Act; (2) damages are significantly in excess of the USD20 billion
escrow fund set up to satisfy OPA 90 claims under the Gulf Coast Claims
Facility and claims for damages; and (3) recovery from BP's
partners in the Macondo well is less than the pro-rata shares.
"Despite the considerable uncertainty around the ultimate cost to
BP, Moody's believes that the group should be able to accommodate
expenses and cash outlays that are equivalent to twice the charge already
incorporated by the group in its Q2 results, while maintaining a
financial profile in line with its A2 rating," says Mr.
The group's ability to pay very large fines and legal claims is
underpinned by annual cash flow generation in excess of USD30 billion
in recent years and its sizeable base of potentially saleable assets.
Moody's rating assessment is based on the premise that BP will successfully
execute its USD25-30 billion asset disposal programme (a significant
step-up from the USD10 billion target set out in mid-June)
over the next 18 months and maintain prudent financial and dividend policies
that will enable the company to reduce net debt in line with its publicly
stated target of USD10-15 billion by the end of 2011. The
company has announced the sale of various upstream assets in the US,
Canada and Egypt for USD7 billion and the sale of its oil and gas exploration,
production and transportation business in Colombia for USD1.9 billion.
BP has also negotiated additional committed bank lines that supplement
a cash balance in excess of USD7 billion reported on balance sheet at
the end of Q2.
According to Moody's, the factors that could over time lead
to a rating upgrade include an overall positive outcome for legal actions
and investigations (including the removal of the threat that BP could
be found to be grossly negligent for the Gulf of Mexico spill),
together with continuing robust cash flow generation and the maintenance
of conservative financial policies.
Conversely, BP's rating could be downgraded should the ultimate
costs related to the Gulf of Mexico oil spill appear likely to exceed
Moody's current range of assumptions due to higher-than-expected
fines and settlements, or because a finding of gross negligence
becomes more likely, or if cash generated from operations and asset
disposals falls below expectations.
Moody's previous rating action on BP was the downgrade of the company's
long-term senior unsecured ratings to A2 from Aa2 on 18 June 2010.
For the assignment of this rating, Moody's has applied its rating
methodology for the Global Integrated Oil & Gas Industry, which
was published in November 2009 and can be found at www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's website
Headquartered in London, UK, BP is one of the largest integrated
oil & gas companies in the world with total proved hydrocarbon reserves
of 18 billion barrels of oil equivalent, reported production of
around 4 million barrels of oil equivalent per day, and operations
in over 80 countries.
Moody's Investors Service invites you to participate in a teleconference
to discuss the basis of today's rating action on BP
Thursday, September 16, 2010
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
Moody's confirms BP's A2/P-1 ratings; outlook stable
One Canada Square
London E14 5FA
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