European oil majors results highlight careful balancing act – Fitch

Cost-cutting initiatives announced by European energy majors such as Shell, Total and BP are modest compared with their upstream-focused US peers, which shows they are still trying to balance keeping strong balance sheets with a commitment to dividends and investment from which they will benefit when the cycle turns, Fitch Ratings said.

It said in a report that the capital and operating expenditure plans of the three companies should reduce their cash flow deficits over the next two or three years if oil prices gradually recover in line with expectations. However, they may not be enough to reduce the deficits in a lower-for-longer price scenario.

Fitch said its base rating case assumes Brent will gradually recover to $45/bbl in 2016, $55 in 2017 and $60 in 2018. “If our forecasts show that some companies’ metrics are unlikely to be in line with our rating guidance under the base case, this could result in some negative rating actions in the near term. However, we expect the number and magnitude of actions to be moderate, in line with our approach of rating through the cycle,”

The rating picture may change if oil prices do not recover as quickly as Fitch expects. “Our current stress case assumes $35/bbl in 2016, $40 in 2017 and $42 in 2018. In this ‘lower for longer’ scenario, we expect oil majors to more aggressively cut their discretionary spending, including dividends, to balance their cash flows and keep debt under control. This scenario also assumes more significant cost deflation, which should make cost cutting an easier task. However, the deflation alone would be insufficient to fully offset the effect of lower oil prices. This could spark more negative rating actions but much will depend on how oil companies react.”

Shell, Total and BP reported 2015 results that were weak but in line with our expectations, reflecting a near 50 percent drop in average Brent prices from 2014, the report said, adding that based on company announcements Fitch expects aggregate 2016 capital expenditure to fall by a further 15 percent, following an average reduction of 15 percent in 2015.

“On operating expenditure, our base case assumes upstream unit costs in the next two to three years will be 30% lower than in 2014. This is in line with the measures announced by companies and results already achieved,” it said.

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