OREANDA-NEWS. Fitch Ratings has affirmed BP plc's Long-term Issuer Default Rating (IDR) at 'A', with Stable Outlook. A full list of rating actions is attached at the end of this commentary.

The affirmation follows Fitch's price deck downward revision and reflects our expectations that BP's leverage will remain within our guidance for the ratings through the cycle. We assume Brent to average USD35/bbl in 2016, before recovering to USD45/bbl in 2017, USD55/bbl in 2018 and USD65/bbl in the long term. Based on these assumptions we expect BP's funds from operations (FFO) net leverage to peak at 3.7x, before settling at around 2.6x in 2017-19, well below our negative rating action trigger of 3x.

BP is a leading global integrated oil and gas (O&G) company with 2015 production of 2.26 million barrels of oil equivalent per day (MMbpd) (including equity affiliates other than Russia's Rosneft) and EBITDAX (EBITDA before exploration charges) of USD20.2bn. BP's credit profile significantly improved in July 2015 following a preliminary agreement with the US Justice Department and five US states to settle the Macondo-related claims for USD18.7bn, payable over 18 years.

KEY RATING DRIVERS
Weak Oil Prices
In 2015, BP's EBITDAX decreased 32% yoy to USD20.2bn as Brent collapsed by 47% to USD53/bbl in 2015. We expect the company's 2016 EBITDAX to drop further on lower oil prices and expected weaker refining margins before starting to recover in 2017. On the other hand, we assume that cost deflation and opex rationalisation will support BP's operating cash flows in the depressed oil price environment. This includes renegotiations with suppliers and service providers, significant announced headcount reduction in upstream and other similar cost-saving measures.

In 2016, BP announced its plans to reduce capex to the lower end of USD17bn-USD19bn in 2016, from USD22.5bn in 2014 and USD20.2bn in 2015. In addition, the company has made a commitment to reduce operating expenses by USD7bn per year up to 2017, after having achieved USD3.4bn savings in 2015. We believe that in a deflationary cost environment these cuts are moderate compared with those announced by more upstream-focused US companies, and should allow BP to maintain at least stable production through the cycle.

However, the company has reiterated its position on maintaining dividends as its financial priority. We assume that if the USD35/bbl environment persists the company is likely to be more flexible with dividends and assume a moderate cash dividend reduction to USD5bn in 2016, USD5.5bn in 2017 and USD6bn in 2018 (vs. USD6.7bn in 2015). BP's continued commitment to stable cash dividends resulting in its inability to manage its free cash flow (FCF) through the cycle could lead to a negative rating action.

Global O&G Super-Major
We view BP's operational profile as strong. Although BP has undergone selective disposals in upstream and downstream since 2011, it remains a leading global integrated O&G producer. Its 2015 upstream production of 2.26MMbpd (including equity affiliates other than Rosneft) trailed that of Royal Dutch Shell plc (AA-/Negative, 3.7MMbpd, including BG), but was ahead of Total SA's (AA-/Negative, 2.3MMbpd). At end-2014, its diversified proved reserves of 9.3bn barrels of oil equivalent (boe) (excluding equity affiliates) implied a healthy proved reserve life of 13 years, ahead of that of many peers. While the end-2015 reserves may be lower on weaker oil and gas prices, their size and BP's strong upstream project pipeline should maintain the company's position in the global league table.

BP's diversification into downstream operations supported its earnings in 2015, and we expect it to be an important stabilising factor, even given lower refining margins in 2016.

Macondo Settlement Credit-Positive
The USD18.7bn preliminary agreement announced in July 2015 settles the vast majority of legal claims related to the Deepwater Horizon oil spill (Macondo) in the Gulf of Mexico, including the Clean Water Act penalty and Five Gulf States claims. The deal remains subject to a final court approval, which is expected in March 2016. The payments will be spread over 18 years, with around USD1.1bn to be paid a year, ie, a reasonable outflow assuming roughly USD18bn in pre-capex cash flow from operations that we expect the company to generate per year in 2016-19. The settlement gives BP considerable flexibility to navigate the current oil price downturn.

Competition, Prices Threaten Disposals
We view positively the company's ability to raise cash through disposals when needed. BP raised USD48bn in disposals through October 2013, and expects additional USD3bn-USD5bn of divestments in 2016 and USD2bn-USD3bn in 2017 and thereafter.

However, numerous disposals may weaken BP operationally, especially if proceeds are paid out as dividends rather than re-invested or used to reduce debt. In addition, with many O&G companies trying to divest their assets simultaneously there is a risk that assets will not be sold, or will fetch far lower prices than planned. We conservatively assume that BP's net disposal proceeds will reach USD3bn in 2016, ie, mainly proceeds from asset sales already agreed, and USD2bn in 2017 and USD1.5bn thereafter.

Rosneft's Dividends Included
When rating O&G companies, we generally focus on 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 Rosneft, in which it holds 19.75%, although the amount of dividends sharply decreased in 2015 and should broadly correlate with oil prices thereafter.

Rosneft paid out RUB87bn (USD1.42bn) in dividends 2015, including BP's share of around USD280m, a modest amount compared with BP's operating cash flow. Taking into account political risks, we do not consider BP's stake in Rosneft, currently valued at around USD7.25bn, as a potential source of liquidity.

KEY ASSUMPTIONS:
- Brent gradually recovering from USD35/bbl in 2015 to USD45/bbl in 2017, USD55/bbl in 2018 and USD65/bbl in the long term
- Flat upstream production in 2016-19
- Macondo-related payments of around USD1.1bn per year
- Capex of USD16bn in 2016-17, rising to USD17bn in 2018 and USD18bn in 2019
- Dividend payout of USD5bn in 2016, USD5.5bn in 2017 and USD6bn in 2018-19
- Dividends received from equity stakes (including the stake in Rosneft) broadly correlating with oil prices
- Net proceeds from divestments of USD3bn in 2016, USD2bn in 2017 and USD1.5bn thereafter

RATING SENSITIVITIES
Positive: Factors that may trigger positive rating action:
- FFO adjusted net leverage consistently below 2.5x through the cycle (Fitch's current base case expectations: 2.4x in 2015; 3.7x in 2016; 2.6x on average in 2017-2018).
- Consistently higher upstream production from 2015 levels
- Organic reserve replacement ratios at or above 100%
- Positive FCF after disposals through the cycle

Negative: Factors that may trigger a negative rating action:
- FFO adjusted net leverage above 3x through the cycle, due to higher-than-expected dividends and capex, or significantly lower oil prices
- Falling upstream production from 2015 levels
- Organic reserve replacement ratios consistently below 100%
- Inability to manage FCF by 2017 or to keep FCF shortfall at a minimum
- Material Macondo-related cash outflows over the agreed USD18.7bn

LIQUIDITY AND DEBT STRUCTURE
At end-2015, BP had USD26.4bn in cash and equivalents. These amounts comfortably covered the company's short-term debt of USD7bn in 2015, as well as its negative FCF at least in 2016-17.

The rating actions are as follows:

BP plc
Long-term IDR: affirmed at 'A'; Outlook Stable
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'.