Fitch Revises BP's Outlook to Positive, Affirms at 'A'
The Outlook revision follows BP's announcement that it has reached an agreement in principle to settle federal, state and local Deepwater Horizon claims for USD18.7bn, payable over 18 years. We believe the deal has significantly reduced the uncertainty around BP's overall payments arising from the accident and hence has considerably strengthened the company's credit profile. The Positive Outlook reflects that there is a real possibility for an upgrade to 'A+' in the next 12 to 18 months, provided that (i) the deal is finalised, and there are no other major claims; (ii) BP's leverage is in line with our positive rating action guidance. i.e. funds from operations (FFO) adjusted net leverage at 2x-2.5x through the cycle; and (iii) BP's upstream business profile does not show any significant signs of weakening, such as falling reserves or production.
BP is a leading global integrated oil and gas (O&G) company with 2014 production of 1.93 million barrels of oil equivalent per day (MMbpd) (excluding equity affiliates) and a well-diversified reserve base. BP's credit profile has significantly improved with the preliminary agreement to settle the Macondo-related claims for USD18.7bn, payable over 18 years. Our previous case assumed the potential for a larger settlement that took much longer to agree.
KEY RATING DRIVERS
USD18.7bn Settlement Credit Positive
The USD18.7bn preliminary agreement settles the vast majority of legal claims related to the Macondo disaster, including the Clean Water Act penalty and Five Gulf States claims. The payments will be spread over 18 years, with around USD1.1bn a year to be paid, comparing reasonably with the roughly USD20bn pre-capex cash flow from operations we expect the company to generate per year in 2015-18. This gives BP considerable flexibility to navigate the current downturn compared with our earlier case.
O&G Super-Major
We view BP's operational profile as strong. It remains a leading integrated O&G producer. Its 2014 upstream production of 1.93MMbpd (without equity affiliates, such as the stake in Russia's Rosneft) was trailing that of Royal Dutch Shell (AA/Rating Watch Negative, 2.5MMbpd), but ahead of Total SA's (AA-/Stable, 1.5MMbpd) and ConocoPhillips' (A/Negative, 1.4MMbpd). BP has strong positions in natural gas, including LNG, which accounted for 52% of its 2014 upstream production volumes. Its diversified proved reserves of 9.3bn barrels of oil equivalent (boe) (without equity affiliates) imply a healthy proved reserve life of 13 years, ahead of many of its peers.
Depressed Oil Prices
In 1H15, BP's EBITDAX (EBITDA before exploration charges) decreased by 30% yoy as Brent collapsed by almost 50% to USD58 in 1H15 from USD109 in 1H14. We believe the company's 1H15 operating profits were mainly supported by rising upstream production, including production sharing agreement effect (+4% yoy), as well as relatively stable natural gas prices and booming refining margins. However, we expect the contribution from the latter two factors to reduce later in 2H15-2016, with cost deflation and rationalisation becoming the major forces supporting the BP's operating cash flows in the depressed oil price environment.
BP has also indicated that it will reduce capex to below USD20bn in 2015, compared with original guidance of USD24bn-26bn. In 1H15 BP's capex stayed at USD9.1bn, down 22% yoy. We believe that the company's capex flexibility should ensure it does not burn too much cash even if oil prices remain depressed.
Disposals Bring Cash, Hurt Production
BP's USD10bn divestment programme for 2014-15 should enhance its liquidity in the face of oil spill payments and lower oil prices, on top of the USD38bn disposals programme completed in 2013. As of July 2015, BP had agreed asset sales for USD7.4bn.
We view positively the company's ability to raise cash through disposals, when needed. However, coupled with tight capex discipline and suspended drilling in the Gulf of Mexico they have resulted in falling production. In 2014, BP's upstream output, excluding equity affiliates, was 1.93MMbpd, 28% lower than in 2009. BP's proved reserves at end-2014 were down 25% compared with end-2009 numbers. We expect that BP's production will stabilise and potentially grow over the medium term with a number of relatively large projects coming on stream in the next three years.
Rosneft's Dividends Included
We generally focus on O&G production from consolidated subsidiaries because cash flows generated by equity affiliates may not be readily available to service debt at the parent company's level. In our forecasts, we assume that BP will continue receiving dividends from OJSC OC Rosneft, of which it holds 19.75%, although the amount of dividends will significantly decrease in 2015 and should broadly correlate with oil prices thereafter.
Rosneft's announced 2014 dividends of RUB87bn (USD1.75bn) mean that BP will be entitled to around USD350m in 2015, a moderate amount compared with BP's operating cash flows. Taking into account political risks, we do not consider BP's stake in Rosneft, currently valued at around USD10bn, as a potential source of liquidity.
Leverage To Stabilise
Assuming gradually recovering oil prices, we expect BP's FFO net leverage to peak at 2.75x in 2015 and to remain below 2.5x over 2016-19, which is our positive rating action guidance. However, there are several moving parts at this stage, including BP's capex and dividend policies following the Macondo agreement, other possible claims, the magnitude of industry deflation and amounts raised through disposals. These uncertainties are why we have not upgraded BP to 'A+' at this stage, but the Positive Outlook indicates the relatively good chance for an upgrade in the next 12 to 18 months.
KEY ASSUMPTIONS:
- Brent gradually recovering from USD55/bbl in 2015 to USD65 in 2016, USD75 in 2017 and USD80 in 2018-19
- Upstream production marginally rising in 2015-16; stable thereafter
- Macondo-related payments: around USD1.1bn per year
- Capex: USD20bn in 2015 as guided; USD17.5bn in 2016 and rising to USD19bn by 2019
- Operating leases (mainly rigs) capitalised using the 8x multiple
- Dividends payable at USD5bn per year
- Dividends receivable from equity stakes (including the 19.7% stake in Rosneft) broadly correlate with oil prices
- USD10bn divestment programme fully completed; USD1.5bn p.a. divested thereafter
RATING SENSITIVITIES
Upgrade to 'A+':
- FFO adjusted net leverage at 2x-2.5x through the cycle
- Organic reserve replacement ratios at or above 100%; growing production
- Finalisation of the USD18.7bn deal; no other major Macondo-related cash outflow
Revision of Outlook to Stable, affirmation at 'A':
- FFO adjusted net leverage at 2.5x-3x through the cycle
- Organic reserve replacement ratios consistently below 100%; stagnant of falling production
- Material Macondo-related cash outflows other than the agreed USD18.7bn
Downgrade to 'A-':
- FFO adjusted net leverage at or above 3x through the cycle
- Consistently low reserve replacement ratios
- Very significant Macondo-related cash outflows other than the agreed USD18.7bn
LIQUIDITY AND DEBT STRUCTURE
At end-1H15, BP had USD32.6bn in cash and equivalents. At end-2014, it also reported committed credit lines of USD7.4bn. These amounts comfortably covered the company's short-term debt of USD9.1bn at end-1H15, as well as its negative free cash flow at least in 2015-16.
The rating actions are as follows:
BP plc
Long-term IDR: affirmed at 'A'; Outlook revised to Positive from Negative
Senior unsecured debt: affirmed at 'A'
BP Capital Markets
Senior unsecured debt: affirmed at 'A'
BP Capital Markets America Inc
Senior unsecured debt: affirmed at 'A'
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