Sep 1 2008
Standard & Poor's Ratings Services said today that it lowered its corporate credit ratings on international oil and gas supermajor BP PLC and its U.S. and U.K. affiliates, including Jupiter Insurance Ltd., to 'AA' from 'AA+'. We also lowered the long-term corporate credit rating on BP Finance PLC to 'AA-' from 'AA'. The downgrades follow our review of the company's business and financial performance and comparison with those of other major integrated oil companies.

At the same time, we affirmed the 'A-1+' short-term ratings on the group. The outlook is stable.

The lowering of the long-term ratings mainly reflects the following negatives, analyzed in the context of benchmarking with other major private integrated oil and gas companies:

- Reassessment of BP's U.S. downstream weaknesses relative to peers. Bridging part of the profitability gap with peers will require a prolonged effort, and the other part of the gap is structural.

- Less conservative than peers' financial policies, as evidenced by BP's heavy (30%) and unexpected hike this year in annual common dividends to over $10 billion, only partly compensated by a reduction in share repurchases. While remaining very strong, BP's financial profile is now significantly less conservative than peers' and is becoming more in line with a 'AA' rating.

- Turbulences around 50%-owned, equity-consolidated, Russia-based affiliate TNK-BP International Ltd., which we downgraded late July to 'BB/B' with a negative outlook, from 'BB+/B' with a stable outlook.

The stable outlook reflects our expectation that BP's excellent business and minimal financial risk profiles will continue to be supported by, in particular:

- Continued successful upstream field start-ups;

- Earnings generation from the group's two largest U.S. refineries, including earnings generation, in coming quarters (even though the U.S. refining environment is likely to remain weak in the near term);

- The success of the company's cost-cutting and profit-improvement plan, including in U.S. downstream; and

- Moderation in future dividend growth and share repurchases.

Under our conservative, declining long-term oil and gas pricing scenario, BP's adjusted funds from operations (FFO) and FFO minus capital expenditures to net debt are set to moderate to about 60% and 20%-25%, respectively, on a fully adjusted basis, from 2011 (and stronger before), sufficient to cover dividends. These credit measures are supported by upstream production growth, full proven reserve replacement, a recovery in developed reserves, and likely moderation in share buybacks. We do not factor in any major debt-financed acquisition, further significant operating disruption, or significant upstream disappointments in terms of production growth or reserve replacement.

Downside to the rating is limited as the current rating factors in some flexibility on the business profile side. Only a combination of very significant disappointments on the factors just mentioned, including BP's relationship with TNK-BP, and a further credit-dilutive inflexion in financial policies and overall profile could create ratings pressure.

Rating upside would require the combination of a sustainable stabilization of both the TNK-BP situation and the Russian environment; a more conservative financial profile and policies; and the successful turnaround of U.S. downstream operations.