Oil giant BP’s A1 issuer rating as well as the long term debt ratings of its guaranteed subsidiaries have been reaffirmed by Moody’s.
In a note to clients, the rating agency said it has also affirmed its Prime-1 commercial paper ratings of BP Capital Markets and BP Corporation North America Inc. The outlook on all ratings was changed to ‘stable’ from ‘positive.’
Sven Reinke, Senior Vice President at Moody’s, said: “Our decision to stabilise the outlook on BP's ratings, despite rising earnings and operating cash flow generation, reflects the increasing shareholder remuneration, which is keeping BP's credit metrics short of our requirements for an Aa3 rating.”
At the same time, Moody's affirmed the A2 issuer rating of BP's wholly-owned subsidiary, BP Corporation North America Inc. (BPCNAI). Explaining its stance, Moody’s the agency the stabilisation of the outlook on BP's ratings reflects expectations that the company's leverage and cash flow metrics are “unlikely” to meet the requirements for an upgrade to Aa3 it previously set.
Despite improved EBITDA and operating cash flow generation in recent quarters supported by rising oil prices, growing upstream production and materially reduced operating costs, Moody's expects that the company's credit metrics will not improve materially over the next 12-18 months.
“Rising shareholder remuneration and the recently announced $10.5 billion acquisition of BHP Billiton Limited's (BHP, A3 Positive) US unconventional oil and gas assets will offset BP's improved operating performance,” Moody’s said.
The rating agency expects BP's net adjusted debt/EBITDA metric to remain close to 2.0x and that its RCF/net debt ratio will not increase solidly above 30% in 2018-19. Accordingly, BP's financial metrics should remain moderately behind its Aa rated peers.
Since Q4 2017, BP offsets the scrip dividend option with share buybacks thereby effectively removing the positive cash flow impact from the scrip option. “This will increase the dividend and related share-buyback cash outflow to around $8.0 billion in 2018 compared with $6.2 billion in 2017. In addition, BP has recently increased its quarterly dividend by 2.5%.”
BP also announced in July 2018 to return $5-6 billion to shareholders via a share buyback programme. While the share buyback programme shall be fully funded with asset disposal proceeds thereby not increasing net debt, Moody's believes that it will result in an EBITDA dilution and is therefore credit negative.
