LONDON (Alliance News) - Ratings agency Standard & Poor's Monday said it has lowered the long and short term corporate credit ratings on BP PLC while assigning a Stable Outlook to the company.
BP's long and short term credit ratings were lowered by Standard & Poor's to A-/A-2 from A/A-1, but the ratings agency said it has a more positive outlook on the stock and removed BP from its negative credit watchlist after placing the company on the list at the start of February.
"The downgrade of BP incorporates the impact of our revised oil price deck and reflects our view that BP's credit metrics in 2016-2017 will be below levels we view as commensurate with the previous rating," said the credit ratings agency.
"Notably, it reflects our view that funds from operations to debt will be materially below 30% in 2016 and could only gradually improve toward this level in 2017 to 2018. It further reflects our
expectation that BP's pre-financing cash flow will be negative in 2016-2018, as BP continues to pay sizeable dividends," the agency added.
Standard & Poor's said the stable outlook on BP reflects its view that the company's credit metrics leave the company headroom for the A- rating, and said it is satisfied with the measures taken by the company since the fall in oil prices in the middle of 2014.
"We think BP's cost-cutting efforts, divestments, and capex reduction should support neutral free cash flow generation beyond 2016. We expect BP's integrated business model to continue supporting healthy operating performance, which already demonstrated signs of resilience in 2015," said Standard & Poor's.
"We continue to view BP's liquidity as strong, supported by its sizeable cash balances, which are sufficient to absorb negative discretionary cash flows for a number of years," the agency added.
If BP's adjusted funds from operations to debt drops below 25% in 2016 and fails to recover above 30% in 2017, Standard & Poor's said it could lower the rating on BP. The agency said this could happen if BP's cashflow came in worse than expected or if the action taken by management to counter the current downturn ended up being "insufficient".
On the flip side, Standard & Poor's said an upgrade to the rating on BP is "remote at this stage", and said this is only likely to happen if there was a rapid recovery in oil prices that exceeds the agency's current price forecasts.
"To support an upgrade we would expect the ratio of funds from operations to debt to be sustainably in the 35% to 40% range, which BP is unlikely to achieve in 2016 to 2017," said the agency.
Standard & Poor's recently-revised commodity price assumptions currently predict a Brent price of USD40 a barrel for the remainder of 2016, USD45 a barrel in 2017 and USD50 a barrel in 2018.
The average price of Brent in 2015 was around USD52 a barrel, according to the agency, with Brent trading below USD35 a barrel on Tuesday afternoon.
BP shares were down 1.9% to 349.80 pence per share on Tuesday afternoon.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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