Fitch Ratings has revised the Outlook on BP plc's Long-Term Issuer Default Rating (IDR) to Positive from Stable and affirmed the IDR at 'A'.
The Short-Term IDR has been upgraded to 'F1+' from 'F1'. A full list of rating actions is below.
The Positive Outlook reflects significant debt reduction in 2022 and our expectation that BP will ultimately move to a more conservative financial profile with net debt in the range of USD20 billion-USD25 billion from 2023. We forecast funds from operations (FFO) net leverage of 0.7x in 2022 rising to around 1.0x by 2024 based on our oil and gas price assumptions. This is well below our positive sensitivity of 1.8x and positions the company favourably compared with similar or higher rated peers. This will provide significant financial flexibility to implement the company's strategy.
BP's 'A' Long-Term IDR is supported by large scale, global operations, broad and diversified business model, a strong reserve base and strong credit metrics. The company intends to enhance the profitability of traditional hydrocarbon businesses over the medium term by focusing on high-grade, low-cost production in fewer countries and maximising its value creation. Additionally, there is a focus on diversifying the earnings streams of low carbon and energy transition businesses and seizing opportunities linked to new and evolving energy markets on the journey to net zero.
The more conservative financial structure and robust liquidity (the group will not need to access any new, external funding over the next 24 months, even under a stress scenario) led to the upgrade of the Short-Term IDR.
Key Rating Drivers
Market Conditions Create Financial Flexibility: Tight hydrocarbon markets are supporting exceptionally high earnings for oil & gas companies. Fitch forecasts EBITDA for BP at around USD59 billion for 2022 (before income from associates and after treating leases as operating expense), moderating to around USD47.5 billion in 2023 and USD25.0 billion by 2025, based on Fitch's oil and gas price assumptions. Cumulative free cash flow in our rating case for 2022 and 2023 is more than USD35 billion (most of which will be used for debt reduction and share buybacks).
Material Debt Reduction: In 2022, the company used 40% of excess cash flow for debt reduction and we estimate Fitch-adjusted net debt will have reduced to around USD37 billion at end-2022, from USD44 billion at end-2021. We forecast net debt to further drop to USD25 billion in 2023, but this will depend on management's allocation of excess cash flow.
BP's priorities for capital allocation are a base dividend (USD0.06006 per share for 3Q22, increasing by at least 4% annually at USD60 per barrel), a strong investment-grade credit rating, disciplined capital investment and share buybacks (in this order).
Robust Financial Profile: We forecast EBITDA net leverage at 0.6x for end-2022, rising to 1.0x by 2025, linked to Fitch's price assumptions, which is well below our positive leverage sensitivity and supports the Positive Outlook. This should be achievable as the medium-term market outlook for oil & gas remains robust and BP should benefit from a sizeable working capital unwind over the next two years (from LNG contracts and moderating prices) and lower restricted cash in margin accounts (when market volatility reduces). Based on its strong financial profile the company is well placed compared with peers including TotalEnergies SE (AA-/Stable), Shell plc (AA-/Stable) and ConocoPhillips (A/Stable).
Strong Business Profile: BP's business profile is underpinned by large upstream production of 2mmboe/d (2.2mmboe/d including equity affiliates), very large oil and gas reserves (proved reserve life of 9.3 years at end-2021 for consolidated operations), international asset diversification, a competitive cost position and integration into downstream, trading and marketing. BP aims to capitalise on its global reach by expanding its LNG franchise, increasing the value-added content of its hydrocarbon sales, optimising costs, broadening exposure to electricity and new energy products and bundling the offering for a growing customer base.
Windfall Taxes Circulating: BP will pay USD2.5 billion of profit tax in the UK in 2022, including USD800 million linked to the 25% uplift levy announced in May 2022. Obligations from the EU 'solidarity payment' are not yet quantifiable, but BP's earnings in the EU only make up around 5% of group profits. Currently there do not seem to be any other countries where BP has upstream production considering windfall taxes, but this could change if market tightness and dislocations persist.
Transition Strategy Gaining Momentum: BP targets generating around 20% of EBITDA (USD9 billion-USD10 billion in absolute terms) from bioenergy, convenience, electric vehicle charging, renewables and hydrogen by 2030. Recent acquisitions, including the 40.5% stake in the Asian Renewable Energy Hub and Archaea Energy, add momentum to the implementation. Overall, BP has a more ambitious sustainability strategy than other integrated oil & gas majors and medium-term earnings from these businesses are clearly growing.
Financing of Energy Transition Businesses: Peak oil demand is expected to be reached in late 2020s. BP does not guide how much of its USD9 billion-USD10 billion target EBITDA for transition growth businesses will be consolidated. BP Bunge Energia, lightsource bp or the Asian Renewables Hub are all equity-accounted, with material debt deployed within those entities (already or in future). If a substantial portion of the transition target earnings has high underlying leverage through project financings (including ring-fencing provisions), these earnings may not mitigate the increasing risk profile of the hydrocarbons business. In this case, higher debt reduction and a more stringent financial profile of the group would be more commensurate with the rating.
Capital Allocation in Focus: While earnings are currently high across the oil & gas sector, balancing interests of shareholders and debt creditors and rebalancing the companies' positions for a sustainable future will become more difficult in the longer term. Capital allocation frameworks will need to evolve and capture the changing debt capacity of major (consolidated) earnings contributors and differences in energy transition strategies.
Derivation Summary
BP is a leading global integrated oil and gas producer with diversified assets in the upstream and downstream segments. In 2021, its production of 2.0mmboe/d (47% liquids; excluding equity affiliates) trailed that of Shell plc (3.0mmboe/d; 55% liquids), but was comparable with TotalEnergies SE (2.1mmboe/d; 62% liquids). BP's upstream assets are well-diversified geographically, with around half of the group's production located in highly rated countries.
BP has strong downstream operations (refining, retail and lubricants) and is a major global LNG player. Its financial leverage towards the end of the forecast horizon is incrementally higher than its principal peers at EBITDA net leverage of around 1x; for Shell and TotalEnergies' long-term leverage expectations range around 0.5-0.7x. All three companies have used exceptional cash flow generation in the prevailing market to reduce net debt to very low levels.
TotalEnergies is ahead with renewables installed capacity of 5.1GW (BP 1.9GW), total electricity generation from renewables and gas of 21.2 TWh and 25,734 electric vehicle charging points (BP 13,000). In turn, TotalEnergies has proportionately lower refined product sales and lower utilisation rates for its refining capacity. BP targets reducing upstream oil & gas production to 1.5mmboe/d (equity and affiliates) by 2030, while TotalEnergies is still expanding hydrocarbon production volumes with an effort to increase the gas share, which would then be more in line with BP later in the decade. As a result, BP will make more progress towards absolute carbon abatement within its business by 2030 and earnings contributions from lower carbon and energy transition businesses will gain in relative importance sooner for BP.
ConocoPhillips is the largest independent exploration & production company in North America with 1.5mmboe/d consolidated production (73% liquids; 1.75mmboe/d including affiliates). The group has meaningful country diversification of upstream production, in jurisdictions with relatively stronger operating environments, a low-cost resource base (economic to develop at less than USD30/barrel) and conservative financial policies. Its net leverage is broadly in line with Shell and TotalEnergies, but gross leverage is significantly lower, given that US producers tend to hold much lower cash balances.
ConocoPhillips lacks the mid-stream and downstream integration/diversification that allow Shell, BP and TotalEnergies to reduce earnings volatility through the cycle. As a focused exploration & production company, ConocoPhillips does not have any material scope 3 emission reduction targets (apart from its Canadian operations, which represent 160,000 boe/d, less than 10% of the business) and lacks future earnings diversification into energy transition businesses.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Brent oil price at USD100/b in 2022, USD85/b in 2023, USD65/b in 2024 and USD53/b thereafter;
Title transfer facility (TTF) gas price at USD38 per thousand cubic feet (kcf) in 2022, USD40/kcf in 2023, USD20/kcf in 2024, USD10/kcf in 2025 and USD5/kcf in 2026;
Henry hub gas price at USD6.75/kcf in 2022, USD5.0/kcf in 2023, USD4.0/kcf in 2024, USD3.0/kcf in 2025 and USD2.75/kcf in 2026;
Macondo-related payments of USD1.5 billion per year over the forecast horizon;
Capex of USD15.5 billion in 2022 (assuming that the Archaea Energy acquisition will close before year-end) and USD16 billion for the following years;
Net proceeds from divestments of USD3 billion in 2022 and 2023, USD1.5 billion for the following years.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO net leverage below 1.8x or EBITDA net leverage below 1.6x on a sustained basis.
Commitment to a disciplined financial policy, including guidance on balancing the evolving business risk profile of the wider group.
Evidence that target returns of 8-10% in the low carbon business are achievable with deployed investments.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The Outlook is Positive, which means negative rating action is unlikely at least in the short term. However, lack of visibility around medium-term net debt profile would result in a revision of the Outlook to Stable.
FFO net leverage above 2.5x or EBITDA net leverage above 2.3x on a sustained basis.
Falling upstream production and EBITDA without growth in other segments such as convenience and mobility or low carbon operations.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Strong Liquidity: At end-September 2022, BP held large cash balances of USD29.3 billion, including restricted cash (amount only disclosed for full financial years; USD4.74 billion at end-2021), against short-term financial debt of USD3.9 billion. Additionally, BP has USD4 billion of available committed standby facilities with maturity in March 2027 and USD8 billion undrawn committed credit facilities with maturity in March 2025.
The group continues to generate strong cash flow and is funded beyond 2025. BP has been repaying large amounts of debt (USD11.1 billion over 9M22; split into USD7.4 billion of debt repurchases and USD3.7 billion debt maturities) and has no real need for refinancing, but may opt to raise some funding if the terms are favourable (USD2 billion over 9M22).
Issuer Profile
BP is one of the largest international oil and gas companies. Its large oil and gas upstream segment is augmented by leading global marketing, refining, trading, LNG and midstream operations. Its assets are spread across the globe.
Summary of Financial Adjustments
Lease liabilities removed from BP's debt. BP's Fitch-adjusted EBITDA and FFO are reduced by right-of-use assets depreciation (USD1.98 billion in 2021). EBITDA is further reduced by lease interest cost (USD288 million in 2021).
BP's working capital was adjusted by USD1.48 billion for the impact of Macondo in 2021. We exclude Macondo-related payments from EBITDA and operating cash flows; they are included after free cash flow.
BP's debt was increased by USD2 billion of financial guarantees at end-2021.
Fair value accounting effects of USD8.08 billion were included in working capital movements and, as a result, do reduce operating cash flow, but not funds from operations.
50% equity credit at USD6 billion was applied for hybrid securities raised in June 2020.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
We have revised BP's ESG Relevance Score for GHG Emissions & Air Quality to '4' from '3' due to the growing importance of the continued development and execution of the company's energy-transition strategy. While this sector risk generally has a negative impact on the credit profiles, and is relevant to the ratings in conjunction with other factors, we view positively BP's advanced and proactive energy transition strategy, which should enable the company to build a more resilient profile and progressively position itself for a low carbon future.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
BP PLC 
