Business

BP suffers third rating downgrade

  • 18 June 2010
  • From the section Business
oil rig in the Gulf of Mexico
Image caption The Gulf of Mexico oil disaster could cost BP $40bn, analysts say

Rating agency Moody's has downgraded BP's credit rating, adding to concerns over the impact of the Gulf of Mexico oil spill on the company's finances.

Moody's downgraded BP's creditworthiness by three notches, following similar moves by the other two rating agencies earlier this week.

Earlier Russian President Dmitry Medvedev added further pressure on BP.

He warned that the oil giant might face "annihilation" as a result of the fall-out of the oil disaster.

In an interview with the Wall Street Journal, the Russian president described the spill as a "wake-up call", and said that "hopefully [BP] can afford the losses".

But BP's chairman Carl-Henric Svanberg later dismissed those comments.

In an interview with Sky News, Mr Svanberg said BP remained "a strong company" despite the "setback" it had suffered in the Gulf.

The company has agreed to put aside $20bn (£13.5bn) to compensate victims of the oil spill.

In announcing its downgrading, Moody's said BP's payments into the fund were "managable", but warned that the full costs of the oil spill would have a negative impact on the company's cash flow for "a number of years".

As a result, it downgraded BP to A2 from Aa2.

BP shares fell 0.6% on Friday, after climbing almost 7% a day earlier.

'Complacency'

Earlier this week, the two other major international credit ratings agencies, Fitch and Standard & Poor's, also downgraded BP.

Mr Medvedev was less sure about BP's ability to cover its payments in the coming months.

Image caption President Medvedev says BP may not survive the oil spill crisis

"What I know is that BP will have to pay a lot of money this year," he said.

"Whether the company can digest those expenditures, whether they will lead to the annihilation of the company or its break up is a matter of expediency".

BP has said that it continues to perform well, with cash flow "expected to exceed $30bn in 2010 before taking into consideration costs related to the Deepwater Horizon spill."

On Thursday, BP boss Tony Hayward was grilled by US congressmen who accused the company of "astonishing complacency" in ignoring dangers when drilling in the Gulf of Mexico.

According to the US coast guard, around 25,000 barrels oil of were recovered from the sea on Thursday. That compares with the 35,000 to 60,000 barrels US experts estimate are leaking into the Gulf every day.

Asset sale

BP has agreed to pay $5bn into the compensation fund this year, followed by quarterly payments of $1.25bn until the total $20bn is paid.

The company has also said it will be selling about $10bn worth of "non-core" assets to raise cash, and has cancelled dividend payments this year.

There has been a great deal of speculation about what assets it might sell.

In Russia, BP holds a 50% stake in TNK-BP - a joint venture with AAR, which is owned by a group of Russian billionaires.

According to analysts at Moscow investment bank Troika Dialog, BP's stake in TNK-BP is worth about $16-$18bn.

However, analysts said that BP may have to take a hit on the price if it is forced to sell.

"If BP decides to sell its [stake in TNK], it will have to do so with a discount to find a buyer faster," Viktor Mishnyakov, energy expert from Uralsib, told the BBC Russian Service.

BP also owns about 1% of the Russian state-run company Rosneft, which is worth another $900m. Rumours about a possible sell-off caused Rosneft's share price to fall by 6% on Thursday.

The head of BP's Russian operations was forced to deny the rumours on Friday, saying that BP has yet to decide exactly which assets to dispose of.

For its part, Lukoil, one of Russia's biggest oil producers, said it would not be interested in buying any of BP assets should the UK oil company decide to sell.

"We are not wolves, we do not eat the weak," said the company's boss Vagit Alekperov.

Rising costs

BP made a profit last year of $14bn, down from $25bn a year earlier.

Analysts say that the compensation fund and initial clean-up costs would, therefore, be easily affordable for BP.

However, they also warn that the threat of legal action and significant fines means it needs to conserve cash.

Standard Chartered warned last week that the total cost to the company, including legal costs, could top $40bn.

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