LONDON (Standard & Poor’s) July 23, 2015–Standard & Poor’s Ratings Services today revised to stable from negative its outlook on U.K.-based international oil major BP PLC. At the same time, we affirmed our ‘A’ long-term and ‘A-1′ short-term corporate credit ratings on the group.
The affirmation and outlook revision reflect our view that actions by BP’s management should be sufficient to maintain credit metrics at a ratings-commensurate level in 2015-2016.
This includes a commitment by BP to continue divestment of noncore assets, with $10 billion planned to be realized over the 2014-2015 period, of which $7.1 billion has already been completed or agreed. In line with our expectations and similar to its peers, BP is also lowering its capital expenditure and implementing a number of cost saving initiatives, which should support profitability in upstream and reduce losses at the corporate level.
We further believe that the $18.7 billion settlement of federal, state, and local claims related to the Deepwater Horizon accident meaningfully reduces the uncertainty related to the total amount of claims and has no negative impact for the rating, as we have already adjusted BP’s debt for a similar amount. Moreover, payments will be spread over 18 years, which removes liquidity pressure, leading us to revise our assessment of BP’s liquidity to
“strong” from “adequate.”The stable outlook reflects our view that BP’s credit metrics in 2015-2016 will be supported by its divestments and reduced capital expenditure, which should largely cover the negative discretionary cash flows we forecast. Although cash flow generation will come under pressure in the upstream segment, given current low oil prices and payments related to the Deepwater Horizon settlement, we think the performance of the downstream segment in 2015 could partially offset this. We also expect that the company’s solid pipeline.
of new projects coming on track in 2015-2017, along with management’s cost cutting efforts, will support gradual improvement of operating margins in upstream.
We could take a negative rating action over the next 12 months if average adjusted FFO to debt were to decline below 30% or if 2015 metrics were considerably below this level. We could also lower the rating if prefinancing cash flow (after dividends and divestments) were to be materially negative in 2015-2016. This could occur if management’s measures to offset the market conditions were insufficient, from both operational and financial standpoints.
An upgrade appears to be remote at this stage. It could materialize only if we see a rapid recovery of oil prices, for instance to our longer-term (2017) price level of $75/bbl. To support an upgrade, we would expect a ratio of FFO to debt close to 45%, which is unlikely to be achieved in 2015-2016.