Wednesday, February 13, 2019 12:20 PM /Fitch
Strong 2018 full-year results from European oil majors, including Shell (AA-/Stable), Total (AA-/Stable) and BP (A/Stable), and contained breakeven oil prices indicate the companies' capacity to withstand potential oil price volatility in 2019, Fitch Ratings says.
We believe lower oil prices will exert little pressure on the companies' ratings unless they fall and remain below USD50/bbl. The main credit pressures for oil majors in the coming years include cost inflation and demands for shareholders returns.
Based on their 2018 results, we estimate that European majors' breakeven oil prices have broadly remained at USD50-60/bbl. However, they may have been higher for Total given the company's increased investments during this period, which it can reduce materially if needed.
The breakeven oil price is the price at which companies can fund capex and cash dividends from operating cash flows before working capital changes. In 2018, Brent prices averaged USD71/bbl, which enabled European oil majors to generate strong post-dividend free cash flows (FCFs) adjusted for working capital changes, ranging from USD2/bbl for Total to USD6/bbl for Shell.
We assume that Brent prices will average USD65/bbl in 2019, which is marginally higher than the current spot price. At this level, oil majors are likely to keep generating positive FCFs, although weaker than in 2018.
Oil majors will need to keep costs under control in order to preserve their ability to withstand lower oil prices. Cost reduction has stalled in 2018, with cost inflation already rising in the US, which may affect other regions over time. However, we think this will likely be a longer term rather than an immediate issue, given sluggish oil prices. Therefore, we expect unit operating costs to remain broadly unchanged in 2019-2020.
Another potential pressure on oil majors' credit profiles could result from demands for higher shareholder returns. The three companies have effectively switched to full cash dividends as oil prices improved, either by cancelling scrips, like Shell and Total, or committing to eliminate the dilution effect through share buy-backs, like BP. Also, Shell has launched its massive USD25 billion buy-back programme over 2018-2020, BP increased its 4Q18 dividend marginally by 2.5% yoy and Total is planning to raise its dividend by 10% over 2018-2020. We believe that these plans are consistent with the reduced cost base and the current level of oil prices, but we assume, in our rating case, that the companies will show flexibility should oil prices decline (eg by postponing buy-backs or re-introducing scrip dividends).
Changes in net debt during 2018 show differences in risk tolerance and varying stages of the investment cycle. Shell reduced its net debt by almost USD15 billion, mainly due to positive FCF and disposals, which prompted us to stabilise its rating outlook in November. Debt reduction continues to be Shell's main financial priority. Conversely, Total and BP increased their net debt, mainly as a result of acquisitions completed in 2018. However, while Total remains well below its conservative gearing target at 15.5% vs the company's 20% maximum threshold, BP's gearing was just above the targeted range of 20%-30% at 30.3%. BP's management is committed to reducing debt through USD10 billion of disposals over the next two years, but the company's leverage will still likely be higher than that of Shell and Total, which explains the difference in ratings.
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