Fitch Ratings Downgraded BP (BP) Ratings

Fitch Ratings has downgraded BP plc's (NYSE: BP) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB' from 'AA', respectively, and downgraded the Short-term IDR to 'F3' from 'F1+'. The Rating Watch on all ratings has been changed to Evolving (RWE) from Negative (RWN). BP Capital Markets plc's senior unsecured issues, which are fully and unconditionally guaranteed by BP, have been downgraded to 'BBB' RWE from 'AA' RWN.

The firm said, "The scale of today's rating action has been partly driven by the increased risk that the balance between long-term and near-term cost payments may now be skewed much more heavily towards the near-term than previously anticipated by Fitch. ). In particular, the recent claims by U.S. state and federal authorities that BP escrow significant sums pre-emptively, ahead of any agreed claims process, represent a material change in approach, should it ultimately prove a legally supportable move against the company."

• 1. Immediate clean-up and claim settlements: Latest estimates from the company are in the range of USD3bn to USD6bn. This is an increase on Fitch's estimate on 3 June 2010 of USD2bn to USD3bn.
  
  
• 2. Near- to medium-term civil fines for the oil discharges or, if BP were found to have committed gross negligence or wilful misconduct higher civil fines: these payments are expected to be quantified and payable in the near- to medium-term and are currently estimated by Fitch at the lower range of USD2bn or higher fines of around USD8bn (BP's share) respectively. These estimates are based on 90 days of mid-point flow rates of 30,000 barrels per day (bpd) until the riser cap was removed on 4 June 2010 then 25,000 bpd until scheduled completion of the relief wells in early August 2010.
  
  The mid-point flow rate of 25,000 bpd represents Fitch's anticipation that the US government scientists (the Flow Rate Technical Group) may increase their estimates of the flow rate again following additional analysis of the impact of the riser cap being removed and BP continuing to capture 15,000 bpd on average.
  
  
• 3. Consensus medium-term incremental one-off costs thus far related to the clean-up have been cited as in the region of USD1.4bn. No estimates of the current operational cash flow impact across the broader group are currently available, and Fitch believes it is too early to make a meaningful assessment, but as an order of magnitude, a 1% increase in BP's North American operating costs would amount to an increase of around USD0.7bn p.a. Exposure to lost revenues in the U.S. downstream is regarded as minimal.
  
  
• 4. Fitch anticipates that long-dated litigation-related damages would be subject to lengthy court proceedings and, given the precedent of Exxon Valdez, large amounts would be payable and contested over many years.

BP's liquidity position as at the last investor conference call (4 June 2010) was USD5bn of available cash across the group, USD5.25bn of undrawn committed bank lines, and USD5.25bn of committed stand-by bank lines. Using Fitch's forecasts, the group's free cash flow before dividends for 2010 is USD6bn. This analysis does not include the potential to monetise existing assets.

Fitch would be surprised if BP did not suspend quarterly cash dividend payments until the operational and financial impact of the incident is clearer.

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