Sunday, May 03, 2020 12:52
PM / by Fitch Ratings/ Header Image Credit: Oilprice
European integrated oil and gas majors could adapt to a low-price environment and preserve their credit profiles if they maintain asset-disposal programmes, introduce scrip dividends and suspend share buybacks until oil prices rebound strongly, Fitch Ratings says in a new report.
Fitch created projections for BP, Shell and Total using three oil price scenarios. We expect all three majors to have significantly higher leverage by end-2020 compared to end-2019, despite the cost-saving measures they have already announced. However, their exceptionally strong business profiles and flexible financial policies could allow them to withstand most price shocks without significant damage to their credit profiles. The companies may announce additional cash-balancing initiatives during their 1Q20 results presentations. We will take those into account when assessing the financial policies that majors will pursue to support deleveraging through the cycle, which will drive our ratings.
Shareholder distributions are among the key levers of oil majors' financial policies. Share buybacks are discretionary and can be cut first. Total and Shell have already announced the cancellation of buybacks planned for 2020. Furthermore, Shell and Total may reintroduce a scrip-dividend option to reduce cash outflows, while BP may stop repurchases of shares issued under its scrip-dividend programme. Shell's credit profile would benefit the most from a scrip dividend due to its high dividend/operating cash flow ratio.
Although the oil companies entered the downturn with much leaner opex and capex budgets than they did in 2014, we expect project costs to drop further. Capital costs will be responsible for a larger part of cost declines as opex cuts will likely to be limited to 10% in 2020. We now forecast that oil and gas production volumes will reduce by a low single-digit percentage-point in 2020-2021 relative to our expectations in early 2020, due to the impact of lower projected prices on high break-even, short-cycle projects and new OPEC+ quotas in certain jurisdictions.
The majors could continue with asset disposals, thereby strengthening their credit profiles. Selling upstream assets is harder in a low-price environment, but we still view asset sales as a viable funding option because we believe valuations will reflect the longer-term view of an asset's cash flow and not just its short-term profitability. Shell sold assets worth around USD22 billion in 2016-2017 during a period of subdued oil and gas prices.
Although we project that the majors will have substantially higher net leverage in 2020 compared to 2019 due to the weak performance of both upstream and downstream segments, our rating analysis focuses on end-2021 credit metrics following the through-the-cycle approach. Furthermore, liquidity remains strong for all three companies despite the need to fund negative free cash flow in 2020 and 2021, as projected by Fitch. The majors historically have maintained very significant cash buffers and had committed credit lines available, largely undrawn. They also issued a significant amount of debt in early 2020 to maintain their levels of liquidity this year.