After second downgrade by Fitch, Standard & Poor's reassesses BP rating

Mikaila Adams
Associate Editor, OGFJ

On Tuesday, Fitch Ratings downgraded BP to BBB from AA after it was discovered that the oil spewing into the Gulf of Mexico resulting from the company-operated Macando well blowout was far greater than originally reported.

The higher spill rate, noted Fitch, could "materially increase BP's exposure to Justice Department fines."

The increased government exposure was cited as a second reason for the downgrade. “The significant step-up in action from the US government surrounding calls for pre-emptive escrowing of damage claims," said Fitch.

The downgrade came just two weeks after Fitch first lowered the rating to AA from AA-plus and placed the company on “watch negative.”

Today, the higher oil leak estimates and questions raised during a US Congressional hearing prompted another ratings agency–Standard & Poor’s–to downgrade the UK-based oil giant to A/A-1 from AA-/A-1+.

“The ongoing CreditWatch placement reflects our view of the continued uncertainties affecting BP, rapid evolution of the situation, and our reassessment of the longer-term impact of the explosion and spill on BP's business,” noted the agency.

Some of the challenges and uncertainties, as stated by Standard & Poor's credit analyst Simon Redmond, 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 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 recently agreed pay $20 billion into a claims fund over the next 3 ½ years. To offset some of this expense, the company has reportedly agreed to increase its cash resources by suspending dividend payments ($10.5 billion in 2009), reduce capital expenditures, ($20 billion projected for 2010), and sell off some assets.

Alone, Standard & Poor’s views these steps “credit supportive,” yet states that, under the circumstances,” BP’s benefit is “less significant than the negative effect on credit that has arisen.”

The agency has revised its assessment of BP's business and financial risk profiles to ‘strong’ and ‘modest,’ respectively, from ‘excellent’ and ‘minimal,” stating 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 its $70/bbl near-term credit oil price assumption, Standard & Poor's estimates BP's adjusted funds from operations 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.

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