BP downgraded by six notches to BBB
Joe McGrath, 15 June 2010
Fitch Ratings has today downgraded BP's long-term issuer default rating (IDR) and senior unsecured rating by six notches to BBB from its previous rating of AA.
The ratings agency cited concerns about the increased likelihood that demands from the US government and federal authorities over the Gulf of Mexico disaster could result in a ‘legally supportable move against the company.’
Analysts at Fitch said the potential financial impact on BP is wide-ranging and can be grouped into four key areas:
1. Immediate costs resulting from the clean-up operations and claims resulting from the oil leak.
2. Civil fines in the short-to-medium term related to the scale of the oil flow rate.
3. The medium term financial impact that the disaster will have on BP’s operations, including higher operating costs and lower revenues from the loss of access to projects (through reputational damage).
4. Long-term litigation related damages.
Fitch estimates that the immediate clean up and claim settlements will be in the region of US $3 billion to US $6 billion – an increase on the original estimate of US $2-3 billion on 3 June 2010.
The cost of civil fines if BP were to be found guilty of gross negligence or willful misconduct would be in the region of US $2 billion – US $8 billion, according to the ratings agency.
Additional costs from the clean up were projected as US £1.4 billion with no firm estimate made for the impact this would have on cash flow across the group and while no number was placed on the cost of long-term litigation, the precedent of Exxon is sufficient to assume this would be a ‘large amount’, Fitch noted.
London-based Fitch analyst Jeffrey Woodruff said in a statement that he would be surprised if BP did not suspend quarterly cash dividend payments until the operational and financial impact of the incident is clearer.
He explained, ‘The agency expects BP's syndicated bank group to permit drawings under the group's liquidity facilities (to the extent that they are contractually committed to provide funds) should BP choose to do so. Both of these actions would be supportive of the group's liquidity position.
‘BP remains one of the world's largest oil companies, and one of the world's most profitable industrial companies overall, with substantial embedded value, and high levels of flexibility in selectively managing its asset portfolio, all of which are characteristics that are supportive of continued access to bank financing.’
BP's liquidity position as at the last investor conference call on 4 June 2010) was US $5 billion of available cash across the group, US $5.25 billion of undrawn committed bank lines, and USD5.25 billion of committed stand-by bank lines.
Using Fitch's forecasts, the group's free cash flow before dividends for 2010 is US $6 billion. This analysis does not include the potential to monetise existing assets.
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