Moody's upgrades credit ratings of BP due to robust financial outlook

Moody's Investors Service has upgraded to A1 from A2 the issuer rating of British oil and gas major BP and the long term debt ratings of its guaranteed subsidiaries

A file photo of BP signing the ADCO concession agreement with ADNOC.
A file photo of BP signing the ADCO concession agreement with ADNOC.

Moody's Investors Service has upgraded to A1 from A2 the issuer rating of British oil and gas major 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 is positive, Moody’s mentioned in a press release received by arabianoilandgas.com.

"Our decision to upgrade BP to A1 factors in the increased clarity around the size and timing of remaining cash payments linked to the Deep Water Horizon incident, as well as expected improvements to BP's credit metrics and its strong operating performance despite high oil price volatility," said Elena Nadtotchi, vice president and senior credit officer at Moody's.

At the same time, Moody's upgraded to A2 from A3 the issuer rating of BP's wholly-owned subsidiary, BP Corporation North America, Inc. (BPCNAI).

Ratings rationale

The upgrade of the ratings to A1 from A2 recognises the reduced uncertainty about the size and future cash flow impact of the remaining liabilities related to the Deep Water Horizon (DWH) accident, providing greater clarity and focus on BP's improving fundamental performance.

Moody’s expects that the company's credit metrics will improve in 2017 with net adjusted debt/EBITDA close to 2.3x and RCF/net debt trending towards 30%, but will remain moderately behind expected performance of the peers, because of the ‘overhang’ of about $16.5bn in liabilities related to the DWH accident that added about 12% to 2016 debt, as adjusted by Moody's.

BP aims to deliver $4.5bn-$5.5bn in divestments in 2017 and $2bn-$3bn in divestments in 2018 to match expected cash payments under the DWH liabilities in the next 12-18 months.

This will reduce the remaining DWH liabilities by about 45% to around $9bn and should help close the gap in credit metrics with the peers.

BP demonstrated strong operating performance amid high volatility in oil prices. In 2014-16, the company cut production costs by over 40% to around $10/boe in line with the performance of its Aa rated peers, including Total S.A. (Aa3 stable) and Chevron Corporation (Aa2 stable).

BP's earnings are largely driven by the performance of the upstream operations. Higher production volumes and improving margins in the upstream are driving the recovery in BP's adjusted FFO generation that the rating agency expects will increase by about 20% to $25bn in 2017.

Factoring reduced level of capex and scrip dividend, the rating agency expects that

BP will generate a negative adjusted FCF in the range of $2-3bn and move to FCF neutrality after the scrip dividend and before the payments under DWH liabilities next year.

BP's A1/P-1 ratings are underpinned by its large and diversified reserves and production base, boosted by the 19.75% investment in Russia’s Rosneft (Ba1 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 maintaining positive outlook

The positive outlook recognises that BP's strong business profile may sustain a higher rating and anticipates that the company will continue to deliver strong operating performance in 2017-19, supported by growth and improving profitability of the upstream, and rising contribution from the downstream.

The positive outlook also factors in Moody's expectation that timely divestments in 2017 and 2018 will help BP to fund cash payments under the DWH liabilities and accelerate the ongoing improvement in BP's credit metrics closer in line with the financial performance of the Aa-rated peers.

What could lead to an upgrade/downgrade

According to Moody’s, the upgrade of A1 ratings would require a sustained improvement in cash flow generation that would allow BP to maintain FCF neutrality after capital investment and scrip dividends.

The upgrade of the ratings would require a significant reduction in the remaining DWH liabilities and lower leverage, with RCF/net debt solidly positioned above 30%.

While not anticipated at this stage, a re-leveraging of the balance sheet and/or delayed recovery in the financial metrics, with RCF/net debt falling sustainably to mid-20s level could lead to the downgrade of the outlook and/or A1 rating.

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