BP's Ability to Cover Macondo Costs Bolstered After TNK-BP Sale

BP's sale of its stake in TNK-BP to Rosneft means it should be able to cover any further legal costs arising from the 2010 Gulf of Mexico oil spill without impairing its financial profile, according to Fitch Ratings. But, said a statement from the ratings agency Tuesday, an upgrade to BP's debt rating of 'A' would require "evidence that its new upstream business strategy is being successfully implemented, or of a better-than-expected settlement with the U.S. Department of Justice".

BP and Rosneft announced Monday that they had agreed 'heads of terms' for the sale of BP's 50-percent stake in TNK-BP for $28 billion in cash and Rosneft shares. The deal demonstrated BP's commitment to Russia, according to BP Chairman Carl-Henric Svanberg, while Russian president Vladimir Putin hailed the transaction as "a good, large deal that is necessary not only for the Russian energy sector but also the entire economy" during a meeting at the Kremlin with Rosneft boss Igor Sechin.

Fitch said that the sale itself – which will swap BP's stake in TNK-BP for an 18.5-percent stake in Rosneft and around $12.3 billion in cash – is broadly neutral for BP's rating as it would not reduce the company's reserves or production. However, the sale will take BP well beyond its $38 billion target for asset sales, so increasing its ability to meet potential future legal costs.

"We estimate that BP's total costs arising from the Macondo spill will end up at between $45 billion and 50 billion, with the key remaining uncertainty being the amount it will have to pay to settle with the DoJ," said Fitch.

Fitch pointed out that it would consider a settlement with the DoJ of $15 billion or less as a positive development for the company.

"We said in July – when we changed the outlook for BP's [Issuer Default Rating] to Positive – that a favourable settlement with the DoJ could be supportive of an upgrade to 'A+'. However, the most likely route to an upgrade would be for BP to also show progress in its 10-point plan to improve its upstream business performance, which was set out in October 2011," added Fitch.

A former engineer, Jon is an award-winning editor who has covered the technology, engineering and energy sectors since the mid-1990s. Email Jon at jmainwaring@rigzone.com.

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