First-half results from the top three European integrated oil and gas companies support our view that they have passed the bottom of the cycle in terms of profitability and key credit metrics and are on a path to deleveraging, Fitch Ratings says.

Royal Dutch Shell, Total and BP all reported stronger results due to higher oil prices, increased production and continued cost-cutting measures. However, their free cash flows varied, and priorities for using cash differed, with Total prioritising debt repayment, BP focussing more on dividends and Shell sitting in between. While we expect all three to broadly balance their cash flows in 2017-2018, their different ratings and rating outlooks reflect potential risks to their financial policies.

Shell posted a 76% increase in 1H17 EBITDAX (which is EBITDA before exploration costs) to USD31.4 per barrel of oil equivalent (boe), including equity affiliates. It also reported free cash flow (FCF) of nearly USD2.9 billion in 1H17, before USD6.8 billion in disposals, well ahead of peers. Consequently, Shell shed nearly USD7 billion in net unadjusted debt and paid USD1 billion more in total cash dividends in the period. The debt reduction was in line with our expectations and Shell’s plans to reduce its debt, which stood at USD90 billion (gross, unadjusted) at 30 June 2017.

Although we expect Shell’s FFO adjusted net leverage to decline to 1.8x by end-2019 from 2.8x at 31 March 2017, helped by its USD30 billion disposal programme, the risks associated with its high debt load were the main reason for keeping its ‘AA-‘ rating on Negative Outlook in June. Risks include weaker-than-expected oil prices, high cash dividends or a resumption of share buybacks that could delay deleveraging.

Unlike Shell, both Total and BP posted negative post-dividend FCF in 1H17 even though they too reported stronger EBITDAX per boe in the period. Total reduced its net unadjusted debt by USD1.8 billion in 1H17, having generated nearly USD3 billion in divestment proceeds under its USD10 billion programme. It also continued its scrip dividend program in 1H17, which is likely to be phased out in 2018-19. This supports our expectation that Total’s leverage will fall to below 2x in 2018-2021, driving the Stable Outlook on its ‘AA-‘ rating.

BP’s net debt increased by nearly USD3 billion in 1H17 as a further USD4.3 billion of payments related to the Gulf of Mexico oil spill continued to weigh on cash flows. However, the Macondo-related payments will start to fall from 2018 and we expect asset sales to help reduce FFO adjusted net leverage to 3x at end-2017 from 3.4x at end-2016. BP expects divestments in the range of USD4.5 billion-USD5.5 billion this year, with most proceeds to be raised in 2H17. The company’s ‘A’/Stable credit profile has more tolerance for higher leverage than its ‘AA’ category peers.
Source: Fitch Ratings