BP credit rating downgraded by Fitch

Ship recovering oil from spill site BP has seen its share price fall dramatically since the oil leak began

Fitch Ratings, one of the three big credit rating agencies, has downgraded BP following the disastrous Gulf of Mexico oil spill.

The oil giant's rating has been cut by six notches, from AA to BBB.

The move means Fitch is less confident of BP's ability to repay its debts following the huge clean-up and legal costs the company is expected to rack up as a result of the spill.

Fitch expressed concerns about "BP's fundamental financial flexibility".

The incident has so far cost BP $1.6bn, the energy giant said on Monday.

Fitch said it expected BP to face greater costs than previously thought in relation to the oil spill, and these liabilities might have to be met immediately or soon, rather than spread over time.

Analysis

This is not the first time since the Deepwater Horizon disaster that BP's credit rating has been cut. But the downgrade by Fitch is unusually sharp.

One of the reasons for the downgrade is US political pressure for the company to set aside more than £13bn against the cost of the Gulf of Mexico oil spill.

BP currently has nearly £3.5bn of cash and £7bn of unused banking facilities. With a high world oil price the company is also generating new funds all the time.

So even the colossal sums currently being talked about by US lawmakers may not be beyond BP's means.

BP bosses are due to meet President Barack Obama on Wednesday. Mr Obama wants BP to pay billions of dollars into a ring-fenced fund to compensate those with "legitimate" damages claims - which is expected to run into many billions of dollars.

"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 toward the near-term than previously anticipated," Fitch said in a statement.

Dividend calls

The downgrade means that BP may find it more expensive to borrow money from investors, but analysts suggested the immediate impact on the company would be small.

David Stedman, oil analyst at Daiwa Securities, said the downgrade would have a "relatively limited" effect in the short term, as BP does not rely heavily on borrowing.

Explaining its decision to downgrade, Fitch added that the volume of oil being lost was higher than had previously been reported, increasing the fines BP would have to pay to the US government.

Moreover, the immediate clean-up costs were also higher than it had previously forecast - ranging between $3bn and $6bn.

Longer-term legal costs will be subject to lengthy court proceedings, Fitch said, with a large amount likely to be payable over many years.

Fitch also said it would be "surprised" if BP did not suspend dividend payments to shareholders while the financial impact of the oil spill remained so unclear.

BP has so far sought to reassure major shareholders that dividends will be paid as normal.

More on This Story

US Oil Spill

FROM OTHER NEWS SITES
This is Money : Obama: BP 'will not control' clean up costs - 4 hrs ago
CNN What can BP afford to pay? - 6 hrs ago
ITN BP bosses braced for White House grilling - 8 hrs ago
Daily Express BP's credit rating cut as spill bill rises - 9 hrs ago
Houston Chronicle BP credit rating falls as talk of claims account rises - 9 hrs ago

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