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Oil, gas majors signal growth after 2018 results: S&P

DUBAI, March 20, 2019

The oil and gas majors' solid preliminary 2018 financial results signal that their broadly improving trend continues, said S&P Global Ratings in a new report.

Key takeaways

•    Lower breakeven prices following sustained cost-cutting and efficiency drives have bolstered operating cash flow.

•    Production growth is strong for some--but not all--despite dramatically lower capital expenditure.

•    Companies now have flexibility within their financial policy frameworks, as leverage is within rating thresholds for most.

The preliminary 2018 reported results and strategy updates of the largest oil and gas companies S&P rates in EMEA are supportive of the current ratings. This follows a series of upgrades and positive outlook revisions in 2018. S&P Global Ratings has observed five common themes across these oil majors and many of the largest US players, namely:

•    Lower breakeven prices underpin the resilience of operating cash flows (OCF);
•    There has been meaningful, cash-generative, production growth for some companies, despite capped capital expenditure (capex);
•    Financial policies are as important for the ratings as actual leverage--companies can choose how much of a buffer to build;
•    More capital is being deployed for mergers and acquisitions and the transition to low-carbon energy; and
•    Disclosures related to leases under International Financial Reporting Standards (IFRS) 16 and US Generally Accepted Accounting Principles (GAAP) are still emerging, with S&P’s initial assessment being that an impact on ratings is unlikely.
These themes have emerged from the bulletins S&P has published this year commenting on ratings headroom and other factors for the individual companies following their 2018 results announcements.

2018 was marked by positive rating actions

“We took positive rating actions on all the largest EMEA oil and gas majors except BP PLC last year. These actions reflected strengthened resilience to lower prices, mostly due to restructured cost bases. They also marked a reversal of the downgrades we took from 2015 to 2016. Those downgrades were by one notch for all of the five supermajors and large EMEA oil companies, except Royal Dutch Shell PLC (Shell), which we downgraded by two notches as a result of Shell's acquisition of BG Group,” said S&P in the report.

The price recovery during 2018 and the rebound in 2019 to date was not so important to the positive rating actions, except to the extent that greater cash generation from higher prices allowed for a reduction in net debt. “More specifically, our ratings focus on our projections of 2019 and 2020 performance rather than on the better cash generation and funds from operations (FFO) to debt than we initially forecast in 2018,” the report said.

“In addition to a recent outlook revision to positive on Total S.A., our rating actions in 2018 include an outlook revision to positive on Repsol S.A. in December, and upgrades of Shell to 'AA-' (September), Eni SpA to 'A-' (August), and Equinor ASA (April) and US-based Chevron Corp. to 'AA' (December).”

Lower breakeven prices underpin resilient OCF

Companies now see structurally low costs as one of the best insurance policies against hydrocarbon price cycles and multi-decade industry uncertainties. Sustained cost cutting since 2014 and a continuing focus on efficiency through logistics optimization, design standardization, and digitization, among others, has rebased the cost profile of the upstream industry.

The cost and capex inflation of the prior decade has been unwound. Just as oil prices go through cycles, so do costs, albeit with a lag. “So while we have already seen some modest cost inflation in North America, the efficiency mantra persists, and prevailed even as oil prices ramped up through much of 2018,” S&P said in the report.

Oil prices are nowhere near the sustained highs of $100 per barrel (/bbl) and above over 2012-2014, with Brent averaging a four-year high of $71/bbl in 2018. Free cash generation for these major integrated oil and gas companies is actually stronger as a result of lower US dollar-denominated capex and cash operating costs. For now, companies can cover their reduced cost bases with oil at $40/bbl less than in 2014. This shift continues to have negative ramifications for oil field service companies and particularly offshore drillers. – TradeArabia News Service




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