Fitch Ratings service has dropped its credit rating on BP plc (NYSE: BP) a breath-taking six notches, from ‘AA’ to ‘BBB’ this morning, and put the company on negative watch for additional downgrades. BP debt is now just two ticks above junk. According to Fitch, the ratings change is the result of the demand from the Obama administration that BP set up an escrow account to pay claims arising from the blown-out Macondo well.
The ratings service also noted that estimates of the size of the spill have jumped to as high as 40,000 b/d, well above yesterday’s estimate of 25,000 b/d. BP’s liability for damages could rise to as much as $4,300/b if the company is proved negligent in its actions at the well.
And that may very well turn out to be the case. In a letter sent yesterday to BP CEO Tony Hayward, the US House Energy & Commerce committee and the subcommittee on Oversight & Investigations presented specific points that it expects to get answers to when Hayward appears before the committee on Thursday. The sentence that is probably causing the most consternation at BP and at Fitch is pretty damning: “In effect, it appears that BP repeatedly chose risky procedures in order to reduce costs and save time and made minimal efforts to contain the added risk.”
The Fitch report also notes that the ratings service “would be surprised if BP did not suspend quarterly cash dividend payments until the operational and financial impact of the incident is clearer.” Fitch believes that where BP once faced long-term payments to meet its obligations for the spill, the company now faces more immediate payments that might be difficult for even BP to manage.
The US Senate majority leader has demanded that BP deposit $20 billion in an escrow account to cover future costs, but some think that is just an opening bargaining position. An ING analyst told The Wall Street Journal that he estimates that BP’s full liability may be around $7 billion. The company could meet that amount without difficulty from its current operating cash flow of about $28 billion annually.
Other estimates of BP’s potential liability are much higher. Goldman Sachs has estimated a total of $33 billion. One bond firm has said that BP could afford to spend up to $58 billion on all the damages from the blow-out before the company would be in danger of bankruptcy.
BP’s shares are up slightly in pre-market trading this morning, but the new rating from Fitch is sure to curb that bit of enthusiasm.
