BP's rating affirmed at 'A' by Fitch with 'stable' outlook

In a note to clients on Monday the ratings agency said its move was based on expectations that BP's leverage will remain within the guidance for the ratings at a time of lower oil prices. Fitch assumes Brent to average $35 per barrel in 2016, before recovering to $45 per barrel in 2017, $55 per barrel in 2018 and $65 per barrel in the long term.

Fitch noted: “Based on these [oil price] assumptions we expect BP's funds from operations (FFO) net leverage to peak at 3.7x, before settling at around 2.6x in 2017-19, well below our negative rating action trigger of 3x.

BP recently announced plans to reduce its capital expenditure to the lower end of $17bn-$19bn in 2016, from $22.5bn in 2014 and $20.2bn in 2015. In addition, the company has made a commitment to reduce operating expenses by $7bn per year up to 2017, after having achieved $3.4bn savings in 2015.

“We believe that in a deflationary cost environment these cuts are moderate compared with those announced by more upstream-focused US companies, and should allow BP to maintain at least stable production through the cycle,” Fitch commented further.

Overall, the agency views BP's operational profile as strong. “Although BP has undergone selective disposals in upstream and downstream since 2011, it remains a leading global integrated O&G producer. Its 2015 upstream production of 2.26m barrels per day (including equity affiliates other than Rosneft) trailed that of Royal Dutch Shell, but was ahead of Total.”

BP's diversification into downstream operations supported its earnings in 2015, and Fitch expects it to be an important stabilising factor, even given lower refining margins in 2016.

Finally, the agency said the $18.7bn preliminary agreement announced in July 2015 settles the vast majority of legal claims related to the Deepwater Horizon oil spill (Macondo) in the Gulf of Mexico, including the Clean Water Act penalty and Five Gulf States claims, was a positive development.

“While the deal remains subject to a final court approval, which is expected in March 2016, the payments will be spread over 18 years, with around $1.1bn to be paid a year, i.e., a reasonable outflow assuming roughly $18bn in pre-capex cash flow from operations that we expect the company to generate per year in 2016-19. The settlement gives BP considerable flexibility to navigate the current oil price downturn,” Fitch concluded.