Fitch downgrades Shell to 'AA-' with negative outlook

Fitch Ratings has downgraded Royal Dutch Shell's long-term Issuer Default Rating (LT IDR) to 'AA-' from 'AA' with a ‘Negative’ outlook.

In a note to clients following the close of trading on Thursday, the rating agency said, “Shell's one-notch downgrade follows our re-assessment of the group's financial profile following the completion of its BG acquisition on 15 February 2016.”

Using Fitch's latest Brent price assumptions of $45 per barrel in 2016, $55 in 2017 and $60 in 2017, the agency forecasts that Shell and BG's combined funds from operations (FFO) net adjusted leverage will peak at end-2016 at under 2.5x before moderating to 2.1x at end-2017, and gradually to 1.9x-2x in 2018-2019, ie, to the upper leverage range of its 'AA-' rating guidance.

Fitch added that its ‘Negative’ outlook on Shell reflects risks stemming from the company materially missing the targeted level of asset disposals in a competitive market environment, expectations of fairly stable dividend payouts, increase in leverage due to recurring negative free cash flow (FCF), lower oil prices and weaker cash generation.

Shell's downgrade also reflects the group's deteriorating financial profile following the completion of the BG acquisition, Fitch added.

“In this oil price environment, the expected improvement to Shell's upstream profile post-BG acquisition does not, in our view, fully offset the forecast deterioration of its credit metrics, as the group's higher post-acquisition leverage exceeds our negative rating action trigger of above 1.5x on a sustained basis,” the agency concluded.