EMEA oil majors face higher 2016 debt as crude prices stay low, Fitch says

Fitch’s new base case oil price assumption is for Brent and WTI oil prices to average $35 per barrel in 2016. It had previously expected oil to average $45 per barrel. However, Fitch’s long-term base case price assumptions remain unchanged at $65 per barrel.

The ratings agency says its drastic revision is down to a combination of stock build-up over the mild winter, higher-than-expected OPEC production in January and increasing evidence that global economic growth for the year will be weaker than previously forecast.

“Our updated company forecasts at these prices suggest that the EBITDA of Shell (AA-/Negative), Total (AA-/Negative) and BP (A/Stable) will drop by a cumulative 28% year-on-year, on top of the 37% decline in 2015,” Fitch said.

Net debt will rise by 15% in 2016 (excluding the effect of Shell's BG acquisition), as the companies will need to cover the gap between weakening operating cash flows and disposals and still significant capital expenditure and dividends, it added.

“Shell will also need to finance the cash part of its BG acquisition. Balancing free cash flows will become easier due to gradually recovering oil prices and more pronounced cost deflation in 2017, although much will depend on the major companies' dividend policies,” Fitch said further.

In recent weeks, Fitch has downgraded Shell to 'AA-'/Negative, revised the outlook on BP to Stable from Positive, and revised Total's Outlook to Negative from Stable.

“These actions reflect our "through the cycle" approach to cyclical company ratings. Our updated forecasts show that BP should sit comfortably in the mid 'A' category by 2018, which is when we expect the cycle to be well on the way to normalising and is the main focus of our analysis,” Fitch added.

However, leverage at Shell and Total will be close to Fitch’s negative rating action trigger. “We may therefore downgrade these companies in the next 12-18 months if they are unable to reduce free cash flow deficits, resulting in leverage rising above our expectations,” the agency concluded.