DBRS Morningstar Removes BP p.l.c.’s Rating from Under Review–Negative; Confirms Issuer Rating at “A”, Changes Trend to Negative

DBRS Ratings Limited (DBRS Morningstar) removed the rating of BP p.l.c. (BP or the Company) from Under Review with Negative Implications. At the same time, DBRS Morningstar confirmed the Issuer Rating of BP at “A” and changed the trend to Negative from Stable.

On 27 March 2020, DBRS Morningstar placed the rating of BP Under Review with Negative Implications. This was in response to the extreme price declines and heightened volatility in crude oil markets largely caused by the rapid spread of the Coronavirus Disease (COVID-19) and the concurrent crude oil price war between OPEC (led by Saudi Arabia) and Russia. Subsequently, DBRS Morningstar revised its commodity price assumptions to factor in (1) the impact of the coronavirus on crude oil demand as lockdowns ease, (2) the significant buildup in global oil inventories, (3) the impact of production cuts recently implemented by OPEC Plus, and (4) measures taken by the Company to adjust to the weaker price environment. Today’s rating action follows DBRS Morningstar’s review of the Company’s business risk profile and financial forecast under the revised commodity price assumptions.

RATING RATIONALE
The rating confirmation is supported by BP’s (1) well-diversified, vertically integrated operations; (2) large size and scale with a significant production base (overall group production of 3,715 million barrels of oil equivalent/day in Q1 2020); (3) long reserve life with low base decline rates; (4) low-cost structure compared to its peers; and (5) strong liquidity position enabling it to withstand market volatility.

The key business factors constraining the rating include the Company’s exposure to volatile oil prices with limited ability to offset upstream segment losses from its downstream assets given the simultaneous decline in demand as a result of the coronavirus impact and its comparatively weaker financial metrics that are expected to remain under pressure throughout 2020.

KEY RATING CONSIDERATIONS
As a result of the severe decline in crude oil prices and demand, the Company’s key credit metrics have been under significant pressure and, at current oil price levels, are well below the “A” range. Nevertheless, the Company has taken steps to decrease its capital spending, reduce operating and overhead costs, and strengthen its balance sheet to manage through the current challenging environment. For 2020, BP has cut its planned capital expenditures (capex) to USD 12 billion from its original plan of USD 15 billion with flexibility to reduce by a further USD 1 billion to USD 2 billion depending on the market conditions. BP is also targeting to reduce operating cash costs by USD 2.5 billion by the end of 2021. Although the Company has not reviewed its dividend policy given the current environment, it retains the right to change future announcements based on prevailing conditions. As a result of its above-mentioned actions, the Company expects it will be able to generate free cash flow (FCF; cash flow after capex and dividends) breakeven Brent oil price of USD 35/barrel (bbl) in 2020-21 (from USD 56/bbl last year).

BP’s liquidity position is strong compared with its peers. At the end of March 2020, the Company had more than USD 18.1 billion of cash balances as well as a USD 10 billion of available new revolving credit facility and undrawn committed standby bank facilities. In April, BP also issued around USD 6.8 billion of new bonds.

DBRS Morningstar expects BP’s key credit metrics under its base-case commodity price assumptions (see DBRS Morningstar’s 15 May 2020 commentary “As Coronavirus Lockdowns Ease, DBRS Morningstar Resets Outlook for Oil and Natural Gas Prices”, https://www.dbrsmorningstar.com/research/361046/as-coronavirus-lockdowns-ease-dbrs-morningstar-resets-outlook-for-oil-and-natural-gas-prices) to be weak in 2020 before starting to recover in 2021 and strengthening further in 2022. DBRS Morningstar assumes a more normalised operating environment by 2022 and anticipates the price of Brent oil to reach the USD 55.00/bbl level, the bottom end of DBRS Morningstar’s deemed midcycle pricing scenario. DBRS Morningstar projects an FCF deficit in 2020 with a projected modest FCF surplus in 2021 and growing in 2022. At the end of March 2020, the total debt was USD 78.5 billion.

RATING DRIVERS
In assessing the Company’s credit risk profile, DBRS Morningstar’s approach is to rate through the cycle and give due weight to projected credit metrics when DBRS Morningstar anticipates a return to a more normalised operating and pricing environment. On this basis and considering DBRS Morningstar’s base-case pricing scenario, the Company’s credit profile supports an overall “A” rating. The risk, in DBRS Morningstar’s view, is that a recovery in crude oil prices will fall short of DBRS Morningstar’s base-case price assumptions and that BP’s overall financial risk profile will not support the current rating. The Negative trend is a reflection of this risk.

DBRS Morningstar will likely change the trend to Stable if the demand/supply fundamentals in crude oil markets improve, leading to greater confidence that prices and, consequently, the Company’s key credit metrics will recover in line with DBRS Morningstar’s base-case assumptions. Conversely, should oil prices and the Company’s key credit metrics drop below DBRS Morningstar’s expectations, DBRS Morningstar could take a negative rating action.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodologies are “Rating Companies in the Oil and Gas and Oilfield Services Industries”
(23 August 2019) and “DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships” (25 November 2019). These can be found can be found at: https://www.dbrsmorningstar.com/about/methodologies.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include annual reports, quarterly reports, and publicly available management presentations. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third-Party Participation: NO
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/363264/.

Ratings assigned by DBRS Ratings Limited are subject to EU and U.S. regulations only.

BP p.l.c.
Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Victor Vallance, Senior Vice President
Initial Rating Date: 30 April 2001
Last Rating Date: 27 March 2020

DBRS Ratings Limited
20 Fenchurch Street, 31st Floor,
London EC3M 3BY United Kingdom
Tel. +44 (0) 20 7855 6600
Registered and incorporated under the laws of England and Wales: Company No. 7139960

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- Rating Companies in the Oil and Gas and Oilfield Services Industries (23 August 2019),
https://www.dbrsmorningstar.com/research/349594/rating-companies-in-the-oil-and-gas-and-oilfield-services-industries.
-- DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (25 November 2019),
https://www.dbrsmorningstar.com/research/353260/dbrs-morningstar-criteria-rating-corporate-holding-companies-and-parentsubsidiary-rating-relationships.

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com.