The aggregate earnings of seven major EMEA oil companies will fall by 22 percent in 2016, and most integrated firms will see a significant deterioration in credit metrics as weaker downstream performance adds to the impact of lower oil prices on cash flows, according to Fitch Ratings’ analysis.
The fall in earnings will come after a 34 percent drop in 2015 and is a severe, but not disastrous decline in the context of a 65 percent drop in oil prices, Fitch said in a report.
“2016 metrics will be weak for current ratings, but our approach is to rate “‘through the cycle” and we therefore focus more on 2018, when we expect the cycle to be past its trough, and by which time companies will have been able to adjust their operating profiles to a more challenging oil price environment,” it said.
This approach is reflected in the limited rating action since February when it lowered its oil price assumptions to USD35/bbl in 2016, rising steadily to USD55/bbl in 2018 and USD65/bbl in the long term, Fitch said.
It said financial priorities of companies also remain a key rating driver. Integrated players have already announced considerable capex cuts and opex savings. “In a USD35/bbl scenario we believe companies will be more flexible with dividends. Companies expecting significant disposal proceeds from upstream assets may see their financial profiles come under pressure if asset sales plans prove challenging to implement. In the current macro environment, agreeing on asset valuation is difficult.”