BP credit rating is cut as costs rise

BP is becoming the new pariah of the oil industry and faces the possibility of having to sell assets if it can’t show some success in the coming weeks at stemming the flow of crude into the Gulf of Mexico, Wall Street analysts and energy experts say.

The fallout from the deadly Deepwater Horizon drilling rig explosion in April continued Thursday, when credit rating firms Moody’s Investors Service and Fitch Ratings reduced their assessments of BP’s long-term debt.

Fitch cut the oil giant to AA from AA-plus, citing the potential for civil and criminal charges and saying “risks to both BP’s business and financial profile continue to increase.”

Fitch estimated that the company could spend as much as $3 billion on cleanup and containment this year. The federal government Thursday sent BP its first bill covering oil-spill response costs so far, totaling $69 million.


Moody’s lowered BP to AA2 from AA1 and put it on review, which might lead to another downgrade. Moody’s said costs related to the protracted oil leak will “weigh significantly” on BP’s cash and “constrain its ability to focus on other key areas of the company’s business.”

Even if a relief well to divert the flow of oil is completed by August, it might be too late to save the British company’s reputation. Some experts are saying that the outcome for the environment in the Gulf of Mexico and for BP could be much worse than previously believed. The disaster began April 20, when a drilling rig operated by a contractor exploded and sank, killing 11 crewmembers.

“The best-case scenario for BP now is to slow the leak and complete the relief well in August” before a serious hurricane hits, said Phil Weiss, a senior energy analyst for Argus Research.

“Worst case involves a serious investigation and charges, and storms in the gulf that both worsen the impact of the spill and delay the completion of the relief wells,” said Weiss, who put a hold rating on BP late last month and hasn’t changed his position. “If that scenario develops, they may have to look at selling off some assets.”

There was little agreement among energy experts on BP’s long-term prospects. Some saw such strength in BP’s overall portfolio that one note to investors began with “Now is the time to buy” BP stock. Others said that BP might find itself in a position where nations wouldn’t want them operating offshore and other oil industry companies would think twice about partnering with them.

BP’s stock has fallen sharply since the accident. On Thursday, BP closed at $39.27, up $1.61 for the day but down from $60.48 on April 20. The relatively low stock price has some speculating that BP could be a takeover target, but any buyer would be taking on the company’s troubles as well as its assets.

Anger continued to build as images of the unchecked leak billowing 500,000 gallons of crude into the gulf every day are broadcast continually by an underwater camera, featured prominently on news broadcasts.

A protest by consumer and environmental advocates is scheduled for Friday outside the company’s Washington office, with props including a giant inflatable oil barrel and an imitator of BP Chief Executive Tony Hayward. Some consumer groups are pushing a boycott of BP operations, which include Arco gasoline stations in California.


In some circles, BP is becoming a symbol of failure, said Phil Flynn, vice president and energy analyst with PFGBest Research.

“ ‘Wow, they really BPed that one.’ ‘That was a real BP.’ You’re starting to hear those things,” said Flynn, who added that the company’s reputation has turned into “dog meat.”

But some analysts had confidence in BP’s ability to survive and prosper, as it managed to do after the March 2005 explosion of its refinery in Texas City, Texas, that killed 15 workers and injured 170. BP has enough operating cash flow to pay off the costs of the disaster even if they exceed $20 billion, said Fadel Gheit, senior energy analyst for Oppenheimer & Co., who wrote the “Now is the time to buy” BP investors note.

“We think the sell-off, which eroded 30%, or $55 billion, of BP’s market capitalization, has created a buying opportunity for long-term and income investors,” Gheit wrote.


But for experts like Amy Myers Jaffe, a senior energy analyst at Rice University’s James A. Baker III Institute for Public Policy, the worst is already playing out, and BP won’t be the only company in the oil industry feeling the result.

Jaffe said that the world was watching something far more significant than a single oil company showing its inability to stop the leak.

“We are watching the best ideas from everyone in the industry, and what their failure tells me is that we need to develop a new technology for dealing with these kinds of disasters,” she said.

To date, Jaffe said, the industry has concentrated on production and prevention of accidents. She said deepwater rigs may be shut down and no new wells drilled perhaps for a considerable time “until the industry can prove to the public that it has a foolproof technology for dealing with deepwater well blowouts.”


That would hurt BP, which since 1989 has developed the Gulf of Mexico into one of its best profit centers. BP operates eight major deepwater facilities delivering about 30% of deepwater production in the gulf.

“The costs are growing by the day, the spill is worsening every day, and BP’s reputation is declining by the day,” said Bruce Bullock, executive director of the Maguire Energy Institute at Southern Methodist University. “Clearly, this is an issue that threatens BP’s existence. The longer it goes on, the more they are threatened.”