In another sign that there is concern about the long-term financial viability of BP plc (NYSE: BP) at least as it is structured as a corporation today, Moody’s sharply cut the UK-based oil companies ratings.
There is an emerging concern that the liabilities from the Deepwater Horizon disaster will spread well beyond the $20 billion escrow account set up by the company. Some members of Congress would like to prevent BP from doing any business in the US.The ratings agency writes:
London, 18 June 2010 — Moody’s Investors Service has today downgraded the senior unsecured ratings of BP p.l.c. (BP) and of all long-term debt securities issued by its subsidiaries and guaranteed by BP by three notches to A2 from Aa2. At the same time, Moody’s has also downgraded the senior unsecured Issuer Rating of BP Finance plc by three notches to A3 from Aa3 and the senior unsecured Issuer Rating of BP Corporation North America Inc. (BPCNA) by four notches to Baa1 from Aa3. All these ratings remain under review for further possible downgrade. Additionally, Moody’s has also placed on review for possible downgrade the Prime-1 short-term rating for BP and subsidiary debt obligations that are guaranteed by BP.
The downgrade of BP’s long-term ratings reflects the worsening impact expected from the oil pouring into the Gulf of Mexico from BP’s subsea Macondo well. Moody’s updated assessment is that the spill will have a sustained negative impact on the group’s free cash flow generation and overall financial profile for a number of years. This assessment reflects a substantial upward revision of the estimated size of the leak, the continued failure to bring the leaking Macondo well under control, and the mounting costs and claims for damages. Moody’s believes that costs for containment, clean-up, litigation and fines are likely to be higher than the rating agency had previously expected in view of the widespread and continuing physical and economic damage.
Moody’s views the agreement reached between BP and the US government for the creation of a USD20 billion fund by BP to satisfy legitimate claims to be assessed by independent third parties as a mildly positive development. Establishing a clear funding mechanism to make payments to injured parties may moderate pressure for the government to pursue more punitive actions. Moody’s views the staggered contributions to be made by BP into the fund over the next three and a half years as manageable from a liquidity perspective, considering the strong cash flow generated from its global operations and the various measures BP has announced to conserve cash. These measures include the suspension of dividends, significant cuts in capital spending and an increase in planned divestments to approximately USD10 billion over the next 12 months.
Moody’s cautions that the agreement over the USD20 billion claims fund does not in any way cap BP’s potential liabilities. Indeed, the rating agency believes that uncertainty over the ultimate cost for massive litigation claims and other contingent liabilities will be an overhang on BP’s creditworthiness that will persist for years to come.
The four-notch downgrade of the BPCNA’s Issuer Rating, which is a measure of its stand-alone credit strength (as distinct from the BP p.l.c. guaranteed debt ratings) to Baa1 from Aa3, considers that the subsidiaries of BPCNA hold the group’s Gulf of Mexico assets.
All ratings remain on review for possible further downgrade. Moody’s review will focus on: (1) BP’s efforts to cap the well and bring a halt to the escalation in environmental and economic damage after which it will be possible to make a more complete assessment of costs; (2) developments with regard to the investigation and judicial process currently underway and the insights these provide on the group’s litigation exposure; (3) details of the security arrangements to be put in place to back-stop BP’s USD20 billion commitment; (4) legal structure considerations, including an updated assessment of assets and liabilities of US subsidiaries; and (5) the allocation of liability for the accident and the potential for the sharing of compensation claims by BP’s partners in the Macondo well.
In addition, while recognising that BP is the largest operator and producer in the Gulf of Mexico, Moody’s will also seek to ascertain how the spill may affect (1) BP’s long-term business prospects in the US, particularly in the Gulf of Mexico; (2) future drilling and producing costs in the US and other deepwater provinces around the world; and (3) how these factors will affect BP’s business profile and future financial performance.
Moody’s previous rating action on BP was implemented on 3 June 2010, when the company’s ratings were downgraded by one notch to Aa2 from Aa1 and placed under review for further possible downgrade.
In assigning this rating, Moody’s has applied its rating methodology for the Global Integrated Oil & Gas Industry, which was published in November 2009, and which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody’s website.
Headquartered in London, UK, BP is one of the largest integrated oil & gas companies in the world with total proved hydrocarbons reserves of 18 billion barrels of oil equivalent, reported production of around 4 million barrels of oil equivalent per day, and operations in over 80 countries.
Douglas A. McIntyre
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