Moody's Downgrades BP To A2 From Aa2
Approximately USD25 billion of rated debt securities affected
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
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.