- Other Europe-based integrated majors may be downgraded
- Spending cuts, cost savings not matching price drop, S&P says
Royal Dutch Shell Plc had its debt rating cut to the lowest since Standard & Poor’s began coverage in 1990, and downgrades of several other major European oil and gas companies will probably follow in coming weeks.
The long-term credit rating for the world’s third-largest oil producer by market value was reduced one level to A+, the fifth-highest investment grade, from AA-, and was placed on watch for another possible reduction, the ratings company said in a statement Monday. S&P also assigned a negative outlook to BP Plc, Eni SpA, Repsol SA, Statoil ASA and Total SA.
Oil has fallen more than 70 percent since June 2014. The slump accelerated after Saudi Arabia led the Organization of Petroleum Exporting Countries’ decision in November 2014 to maintain output and defend market share against higher-cost producers including U.S. shale drillers. Speculation that the downturn will be prolonged has increased as volatility in Chinese markets bolstered concern that demand will drop in the world’s second-biggest crude-consuming country.
S&P’s moves come after the ratings company lowered its 2016 oil-price assumption Jan. 12, reducing Brent crude by $15 a barrel to $40. The 52 percent average price decline in 2015 won’t be matched by most companies’ cost and spending reductions, S&P said.
"We now believe many major oil and gas companies’ current and prospective core debt coverage metrics are likely to remain below our rating guidelines for two or three years as the industry adjusts to lower prices," S&P analysts said in the report.
Jonathan French, a spokesman for Shell, declined to comment in an e-mail.
Shell’s B shares fell as much as 2.6 percent to 1,461.5 pence in London on Tuesday, and were at 1,462.5 pence as of 8:33 a.m. local time. BP, which reported a 91 percent slump in fourth-quarter profit before the market opened, sank 6.5 percent to 343.15 pence.
Oil producers have lost more than $1.7 trillion in market value since crude prices began to slide. The specter of shrinking cash flow prompted more than 240,000 job cuts as drillers canceled rig contracts, slashed dividends and walked away from their riskiest, most ambitious projects.
Chevron Corp., the world’s largest oil producer by market value after Exxon Mobil Corp., last week posted its first quarterly loss in 13 years as crashing prices forced it to write down the value of its holdings. More red ink is expected this week as other large producers disclose results.