Integrated Oil & Gas Outlook 2019: Credit risks balanced as strategic challenges intensify

Source: press release, 10 December 2018

Median leverage – Scope-adjusted debt/Scope-adjusted EBITDA (x) – within Scope’s peer group and Brent oil price (USD/bbl) (source: Company reports, Bloomberg, Scope)
Median leverage – Scope-adjusted debt/Scope-adjusted EBITDA (x) – within Scope’s peer group and Brent oil price (USD/bbl) (source: Company reports, Bloomberg, Scope)

Companies analysed by Scope – the five oil Majors and the large and medium-sized Europe-based IOCs – reduced by half the cash-neutral oil price (the price that is required for operating cash flow to cover organic capex and dividends) to close or below $54/bbl in 2018 (equivalent to the average price of Brent crude oil in 2017). With the commencement of new projects, which have even lower break-even levels, it is expected to fall further.

Scope Ratings says the sector’s credit outlook is stable for 2019, but much depends on what mix of financial and operational strategies the companies adopt to contend with the uncertain external conditions. Leverage, defined as the ratio of Scope-adjusted debt to Scope-adjusted EBITDA, should be close to or even below pre-downturn levels through 2019.

“The IOCs are more resilient today to possible price shocks than before the previous slump in crude prices through their success in optimising capital expenditure, operating expenses, and shareholder remuneration,” says Marlen Shokhitbayev, analyst at Scope.

With the sector back to generating free cash flow, those companies with the lower break-even levels in their upstream business and stronger exposure to downstream are expected to perform most robustly, Shokhitbayev says.

Sector debt is already close to or within individual corporates’ target levels, so corporate treasurers are unlikely to use their financial headroom to further reduce borrowing. Shareholders, on the other hand, could well see improved returns, as companies switch back to cash from scrip dividends, and even raise them, if oil prices remain between at least USD 60 and USD 70 per barrel.

The IOCs’ upstream businesses remain in the hunt for low-cost resources, with management still focused on keeping costs under control, given how volatile prices remain. In the downstream segment, we expect to see continued emphasis on shifting into higher value-added production.

“The complicating factor is the pressure to find new or expand existing low-carbon activities, amid growing investor focus on sustainability and renewed regulatory concern in Europe, if not the US, on greenhouse gas emissions,” says Shokhitbayev.

For now, the IOCs are diversifying into different technologies. It is worth noting that none, however, is allocating much more than 10% of investment to low-carbon activities.

Note: The IOCs analysed by Scope comprise the five oil Majors – BP plc, Chevron Corp, Exxon Mobil Corp, Royal Dutch Shell plc, Total SA – and the large and medium-sized Europe-based integrated producers: Eni SpA, Equinor ASA, Galp Energia SGPS SA, MOL Hungarian Oil and Gas plc, OMV AG, Repsol SA.