Moody’s Downgrades BP Again, Markets Shrug

18 June 2010

Much like the Macondo well on the Gulf seafloor, the negative news keeps flowing on BP. So much so, that investors seem to be almost numb. The latest is that Moody’s cut BP’s credit rating three notches Friday morning. The ratings firm writes:

The downgrade of BP’s long-term ratings reflects the worsening impact expected from the oil pouring into the Gulf of Mexico from BP’s subsea Macondo well. Moody’s updated assessment is that the spill will have a sustained negative impact on the group’s free cash flow generation and overall financial profile for a number of years. This assessment reflects a substantial upward revision of the estimated size of the leak, the continued failure to bring the leaking Macondo well under control, and the mounting costs and claims for damages. Moody’s believes that costs for containment, clean-up, litigation and fines are likely to be higher than the rating agency had previously expected in view of the widespread and continuing physical and economic damage.

This isn’t the first time Moody’s cut the company’s rating in response to the spill. On June 3, Moody’s downgraded BP to Aa2 from Aa1, saying it expected costs related to the disaster would “weigh significantly” on BP’s capacity to generate cash flow.

The markets aren’t reacting to the downgrade much.The most heavily traded BP bonds are still rising in price. And BP’s London shares are still solidly positive, up about 2%.

That’s probably due to the flurry of downgrades the company has received lately. Fitch Ratings cut BP’s credit rating six notches on Tuesday. And Standard & Poor’s Ratings Services lowered its rating on BP by two notches Thursday, in its second downgrade on the oil giant this month.

The most recent ratings cuts have got to be a disappointment for BP, which has been working to reassure the credit raters that it has pockets that are deep enough and the cash flows to cover the ever-mounting — and still unknown — costs of the spill.

In the investor conference call the company held on Wednesday to explain some of the details of the deal it made to the White House to contribute $20 billion into a claims fund, BP Chief Financial Officer said BP was in close dialogue with Moody’s Investors Service and Standard & Poor’s, “making sure they are well aware of the cash flow and balance sheet elements of the firm.” Grote continued, “As we sit here today, we remain AA rated by both Moody’s and S&P,” he said. “We would hope that the actions we took today would be reinforcing to that rating.”

And still, the ratings didn’t hold. Moody’s now has BP at “A2,” and S&P has it at “A.”