DBRS Morningstar Changes Trend on BP p.l.c. to Stable from Negative, Confirms Issuer Rating at "A"

DBRS Ratings Limited (DBRS Morningstar) changed the trend on BP p.l.c. (BP or the Company) to Stable from Negative and confirmed its Issuer Rating at "A". The trend change reflects DBRS Morningstar's expectation that the Company's key credit metrics will improve substantially through 2022 to support the ratings. The expected improvement is driven by a recovery in crude oil prices and BP's focus on reducing financial leverage.

KEY RATING CONSIDERATIONS
The rating confirmation reflects the Company's resilient business profile underpinned by its (1) well-diversified, vertically integrated operations; (2) large size and scale with a significant production base; (3) low-cost structure compared with peers; and (4) strong liquidity position enabling it to withstand market volatility. Key factors constraining the rating include BP's ability to successfully transform its business into a more integrated energy company by investing in low-carbon renewable energy and bioenergy projects as well as the Company’s credit metrics that, while improving, remain outside the range for the current rating.

The challenging environment caused by the Coronavirus Disease (COVID-19) resulted in a steep decline in the Company's earnings and cash flow. In response, BP reduced its operating and overhead costs, cut capital expenditures (capex), and reduced its quarterly dividends. Nevertheless, the Company generated a material free cash flow (FCF; cash flow after capex and dividends) deficit, which it funded with proceeds from its divestments and issuance of hybrid bonds. DBRS Morningstar assigned a 25% equity weighting to the hybrid bonds. As a result, the higher debt combined with lower earnings and cash flow caused BP's credit metrics to weaken considerably.

DBRS Morningstar expects the Company to generate FCF surpluses in 2021 and 2022 based on DBRS Morningstar's base-case commodity price assumptions (see DBRS Morningstar’s press release “DBRS Morningstar Updates Oil and Natural Gas Price Forecasts: Coronavirus Vaccinations and OPEC+ Production Cuts Underpin Speedy Oil Price Recovery” dated February 23, 2021). In Q1 2021, BP achieved its net debt target of USD 35.0 billion (excluding hybrids of USD 11.9 billion), ahead of its YE2021 plan.

Going forward, the Company expects to allocate 60% of its FCF surpluses to share buybacks with the balance directed toward deleveraging. Consequently, DBRS Morningstar expects BP’s key credit metrics to recover in 2021 and 2022 to support the current rating.

DBRS Morningstar notes the Company's new strategy to reposition the business away from oil and gas (O&G) activities to become a net-zero carbon company by 2050. BP intends to scale up its electricity and energy as well as its convenience and mobility businesses significantly over the next decade while reducing its O&G production by approximately 40% over the same period.

Nonetheless, the O&G business will continue to be the predominant driver of earnings and cash flow over the next four years.

While the new strategy does address the challenge associated with decarbonization, it also entails significant capex (USD 5 billion to USD 7 billion annually over the next decade) and execution risk.

RATING DRIVERS
BP’s key credit metrics for the last 12 months ended 31 March 2021 (lease-adjusted net debt to cash flow of 3.11 times (x); lease-adjusted net debt to capital of 43.3%, and earnings before interest and taxes interest coverage of 1.02x) remain outside the range for the current rating. Although DBRS Morningstar expects key credit metrics to improve, this is unlikely to trigger a positive rating action. DBRS Morningstar may take a negative rating action if BP's credit metrics fall considerably below DBRS Morningstar’s base-case expectations and/or if BP's business transition plans incur a high level of execution risk that may materially affect the resilience of its business.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

The principal methodology is Rating Companies in the Oil and Gas and Oilfield Services Industries (17 August 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (2 November 2020),
https://www.dbrsmorningstar.com/research/369165/dbrs-morningstar-criteria-preferred-share-and-hybrid-security-criteria-forcorporate-issuers and DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-toenvironmental-social-and-governance-risk-factors-in-credit-ratings.

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 publicly available information, namely Annual Reports & Form 20-F, quarterly performance reports, and other publicly available management presentations. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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: http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380696/bp-plc-sensitivity-analysis

This rating is endorsed by DBRS Ratings GmbH for use in the European Union.

Lead Analyst: Rana Toukan, Vice President
Rating Committee Chair: Victor Vallance, Senior Vice President
Initial Rating Date: 30 April 2001
Last Rating Date: 30 June 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

-- Rating Companies in the Oil and Gas and Oilfield Services Industries (17 August 2020),
https://www.dbrsmorningstar.com/research/365808/rating-companies-in-the-oil-and-gas-and-oilfield-services-industries.
-- DBRS Morningstar Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (2 November 2020),
https://www.dbrsmorningstar.com/research/365808/rating-companies-in-the-oil-and-gas-and-oilfield-services-industries
-- DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (3 February 2021), https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

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