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BP's Path Forward Clearer with Macondo Settlement, Says Moody's

BP plc's agreement to settle all the major federal, state and municipal claims related to the Macondo tragedy five years ago in the deepwater Gulf of Mexico led Moody's Investors Service on Wednesday to upgrade the ratings to positive from negative.

The London-based supermajor, whose main operations are in the United States, in October agreed to settle claims against subsidiary BP Exploration and Production Inc. for a total of $20.8 billion (see Daily GPIOct. 5).

"While the settlement is large, we view the scope and extended payout terms as important and positive developments for BP, allowing it to move forward with a lot more certainty around the size and cash flow burden of its legal liabilities," Senior Vice President Tom Coleman said. "It will also help clarify a stronger core operating and credit profile for BP as it moves into a post-Macondo era."

The settlement would result in about $10 billion of additional pre-tax charges to income in the second quarter of 2015, bringing BP's total Macondo-related charges to $53.5 billion since 2010, according to Moody's.

"While substantial, the additional charge can be absorbed by BP's balance sheet, with a current book equity in the area of $111 billion. From a cash flow perspective, the extended payout terms will considerably smooth out and ease the impact of the payments on BP's cash flow from operations, resulting in annual outflows in the area of $1.1 billion, a supportable amount in the context of BP's $30 billion cash flow profile."

As important, said Moody's, the settlements will reduce the overhang from Macondo liabilities, allowing BP "to move forward and better focus on its core operations after a long period of restructuring and retrenchment. Despite the losses and liabilities stemming from the Macondo accident and more than $38 billion of asset divestments since 2010, BP retains a fundamental asset and operating profile that is stronger than indicated by its 'A2' long-term rating, along with moderate financial leverage and strong liquidity."

 

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