BP's outlook upped to 'positive' by Moody's on proposed US settlement

Ratings agency Moody’s has changed BP’s ratings outlook to 'positive' following the oil major’s announcement of an $18.7bn agreement in principle to settle all the main US federal, state and municipal claims against its wholly-owned subsidiary, BP Exploration and Production (BPXP), related to the Macondo accident and subsequent Gulf of Mexico oil spill of April 2010.

The improved ratings outlook pertains to A2 long-term debt and Prime-1 commercial paper ratings of BP and its guaranteed subsidiaries. The rating agency also changed to 'positive' from 'negative' the outlook on A3 and Baa1 Issuer Ratings of BP Finance and BP Corporation North America, respectively. Moody’s also affirmed all the said ratings.

Tom Coleman, senior vice president at Moody’s, said, “While the settlement is large, we view the scope and extended payout terms as important and positive developments for BP, allowing it to move forward with a lot more certainty around the size and cash flow burden of its legal liabilities.

“It will also help clarify a stronger core operating and credit profile for BP as it moves into a post-Macondo era."

The settlement will result in bulk of the $18.7bn amount to be paid over a period of 15 to 18 years. All of BPXP's payments will be guaranteed by both BP Corporation North America and BP, avoiding any need for bonding, letters of credit or other collateral and leaving BP's $32bn cash position unencumbered.

However, the settlement will result in about $10bn of additional pre-tax charges to income in the second quarter of 2015, bringing BP's total Macondo-related charges to $53.5bn since 2010.

The settlement is still subject to a period of public comment with final sign off via a Consent Decree by the District Court of the Eastern District of Louisiana, which could take some months. Moody's believes that the preliminary agreement looks secure enough given the active participation of all the major claimants, but the rating agency would need to reconsider BP's positive ratings outlook if the settlement were derailed for any reason.