Oil Rout Prompts Moody's to Consider Shell, Total for Downgrade

Shell, Total and other oil companies have been battered by a more than 75 percent collapse in crude prices over the past 18 months amid a global supply glut.

Shell, Total and other oil companies have been battered by a more than 75 percent collapse in crude prices over the past 18 months amid a global supply glut.

Photographer: Andrey Rudakov/Bloomberg
  • Moody's says crude slump will result in much lower cash flows
  • Prices may recover more slowly than companies project

Royal Dutch Shell Plc, Total SA and Statoil ASA, three of Europe’s biggest oil producers, were among more than 100 energy companies whose credit ratings were placed on review for possible downgrade by Moody’s Investors Service.

The reviews come after the rating company cut its oil-price forecasts and should for the most part be completed this quarter, Moody’s said in a statement on Friday. Prices may recover more slowly than companies expect and there is a risk they may fall further, it said.

“Even under a scenario with a modest recovery from current prices, producing companies will experience much lower cash flows,” Moody’s said. “Today’s review for downgrade considers that much weaker industry fundamentals have potential to warrant rating changes.”

Shell, Total and other oil companies have been battered by a more than 75 percent collapse in crude prices over the past 18 months amid a global supply glut and as China’s economy slows. Shell, Europe’s biggest producer, said this week it expects fourth-quarter profit to drop at least 42 percent.

Wider Review

A total of 69 exploration and production companies in the U.S. including Schlumberger Ltd. and Chesapeake Energy Corp. were put under review for downgrade, as well as 11 mining companies including Alcoa Inc., Moody’s said in separate statements on Friday. BP Plc was also placed on review. The ratings firm reduced its estimates for both West Texas Intermediate and Brent to $33 a barrel for 2016, cutting the U.S. benchmark forecast by $7 and Brent by $10, citing increased supplies from OPEC as well as moderate consumption growth.

Moody’s long-term debt ratings for Shell and Total are the second-highest investment grade while Statoil’s is one step lower. While Moody’s describes the ratings as “high quality, subject to very low default risk,” Shell’s five-year credit default swap, the cost of protecting its debt against default, has more than tripled in the past year. Those for Total and Statoil have doubled.

Moody’s will also review the ratings of EBN BV and two U.S. refining joint ventures linked to Shell, Motiva Enterprises LLC and Deer Park Refining LP.

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