BP plc Downgraded By S&P To "A/A1"On Spill Costs

S&P lowered it long- and short-term corporate credit ratings on BP
to ‘A/A-1’ from ‘AA-/A-1+’ and kept the firm on CreditWatch negative.

The ongoing CreditWatch placement reflects S&P’s view regarding the continued uncertainties affecting BP, rapid evolution of the situation, and its reassessment of the longer-term impact of the explosion and spill on BP’s  business.

BP’s shares closed flat after being up sharply most of the day.S&P added:

Standard & Poor’s Ratings Services
said today that it lowered its long- and short-term corporate credit ratings
on U.K.-headquartered oil major BP PLC to ‘A/A-1’ from ‘AA-/A-1+’. The ratings
remain on CreditWatch, where they were placed with negative implications on
June 4, 2010.

“The downgrade reflects our opinion of the challenges and uncertainties that
BP continues to face in the aftermath of the explosion on the Deepwater
Horizon rig in the Gulf of Mexico on April 20, 2010, and the subsea Macondo
well blowout,” said Standard & Poor’s credit analyst Simon Redmond. “These
challenges and uncertainties include the difficulties BP is experiencing in
containing the spill as well as the ultimate extent of the pollution, the
consequences for BP of ongoing official investigations, and the implications
of these investigations for the magnitude and timing of further cash payments
by BP.”

BP is now subject to intense political pressure in the U.S., its largest
market. We see these factors as fundamental issues differentiating BP from its
peers.

BP reported net debt of $25.2 billion as of March 31, 2010 ($45.2 billion pro
forma when we include the $20 billion claims fund commitment announced on June
16, 2010).

BP has reportedly agreed to make $20 billion of phased payments into a
specially established claims fund over the next three?and-a-half years. At the
same time, BP has reportedly agreed to increase its cash resources and to this
end has agreed to suspend dividend payments ($10.5 billion in 2009), reduce
capital investments ($20 billion projected for 2010), and accelerate asset
disposals. On their own, we view these steps to increase cash resources as
credit supportive although, in the circumstances, we are of the view that
their benefit is less significant than the negative effect on credit that has
arisen.

As a consequence, we have revised our assessment of BP’s business and
financial risk profiles to “strong” and “modest,” respectively, from
“excellent” and “minimal.” This reflects our view that the materiality of the
uncertainties and challenges currently facing BP distinguish it from its
peers, whose very significant underlying strengths–including huge global
cash-generative upstream activities–it otherwise shares.

Under our $70 per barrel near-term credit oil price assumption, we currently
estimate BP’s adjusted funds from operations (FFO) to debt to be well below
50% in 2010 and that BP’s discretionary cash flow (after contributions to the
claims fund and taking account of reduced dividends) will likely break even in
2010.

We will review the CreditWatch placement after further discussion with BP’s
management. As part of the review, we will consider scenarios factoring in
likely higher costs and possible future crystallization of settlement and
other payments. Potential liabilities will continue to mount as long as the
pollution flow continues.

We will continue analyzing both BP’s financial and business risk profiles, and
refining BP’s financial parameters for its ratings, in the context of its
business risk.

We believe certain near-term uncertainties have been addressed by the
agreement with the U.S. government of June 16, 2010. However, because of the
rapidly developing situation, forthcoming hurricane season, and general
uncertainty about the situation, we cannot rule out further rating adjustments
at this point.Standard & Poor’s Ratings Services
said today that it lowered its long- and short-term corporate credit ratings
on U.K.-headquartered oil major BP PLC to ‘A/A-1’ from ‘AA-/A-1+’. The ratings
remain on CreditWatch, where they were placed with negative implications on
June 4, 2010.

“The downgrade reflects our opinion of the challenges and uncertainties that
BP continues to face in the aftermath of the explosion on the Deepwater
Horizon rig in the Gulf of Mexico on April 20, 2010, and the subsea Macondo
well blowout,” said Standard & Poor’s credit analyst Simon Redmond. “These
challenges and uncertainties include the difficulties BP is experiencing in
containing the spill as well as the ultimate extent of the pollution, the
consequences for BP of ongoing official investigations, and the implications
of these investigations for the magnitude and timing of further cash payments
by BP.”

BP is now subject to intense political pressure in the U.S., its largest
market. We see these factors as fundamental issues differentiating BP from its
peers.

BP reported net debt of $25.2 billion as of March 31, 2010 ($45.2 billion pro
forma when we include the $20 billion claims fund commitment announced on June
16, 2010).

BP has reportedly agreed to make $20 billion of phased payments into a
specially established claims fund over the next three?and-a-half years. At the
same time, BP has reportedly agreed to increase its cash resources and to this
end has agreed to suspend dividend payments ($10.5 billion in 2009), reduce
capital investments ($20 billion projected for 2010), and accelerate asset
disposals. On their own, we view these steps to increase cash resources as
credit supportive although, in the circumstances, we are of the view that
their benefit is less significant than the negative effect on credit that has
arisen.

As a consequence, we have revised our assessment of BP’s business and
financial risk profiles to “strong” and “modest,” respectively, from
“excellent” and “minimal.” This reflects our view that the materiality of the
uncertainties and challenges currently facing BP distinguish it from its
peers, whose very significant underlying strengths–including huge global
cash-generative upstream activities–it otherwise shares.

Under our $70 per barrel near-term credit oil price assumption, we currently
estimate BP’s adjusted funds from operations (FFO) to debt to be well below
50% in 2010 and that BP’s discretionary cash flow (after contributions to the
claims fund and taking account of reduced dividends) will likely break even in
2010.

We will review the CreditWatch placement after further discussion with BP’s
management. As part of the review, we will consider scenarios factoring in
likely higher costs and possible future crystallization of settlement and
other payments. Potential liabilities will continue to mount as long as the
pollution flow continues.

We will continue analyzing both BP’s financial and business risk profiles, and
refining BP’s financial parameters for its ratings, in the context of its
business risk.

We believe certain near-term uncertainties have been addressed by the
agreement with the U.S. government of June 16, 2010. However, because of the
rapidly developing situation, forthcoming hurricane season, and general
uncertainty about the situation, we cannot rule out further rating adjustments
at this point.

Douglas A. McIntyre