Integrated oil and gas: sector outlook remains negative; company focus on boosting liquidity

Source: press release, 31 August 2020

illustration: Scope Ratings
illustration: Scope Ratings

Integrated oil and gas companies (IOCs) have acted decisively to conserve cash faced with the double blow of the economic crisis and collapse in oil prices in March and April, says Scope Ratings, a credit rating agency.

Europe’s IOCs have all followed a similar playbook: they used their strong balance sheets to tap bond markets to shore up liquidity, cut back operating costs partly through furloughing staff, and reduced capital expenditure. In some cases, companies have lowered dividends, such as BP PLC which cut its interim pay-out by half, or offered shareholders a scrip alternative, as Total SE did with its final 2019 dividend.

The situation in the US sector has proved more mixed. Domestic IOCs showed their balance sheet strength, although in the shale sector, exploration and production company Chesapeake Energy filed for Chapter 11 bankruptcy at the end of June.

The operating context for the IOCs now looks considerably more stable, assuming there is no significant second wave of COVID-19 infections in major economies. One important factor is the recent steadying of crude prices at around USD 40 a barrel, helped by OPEC+ agreement on production cuts, up from H1 lows near USD 20/barrel for Brent crude.

Since the oil price collapse in March, the European and large US IOCs have issued more than USD 90 billion equivalent in bonds with ExxonMobil and BP accounting for almost a half of that amount. BP successfully placed a jumbo EUR 10.6 billion hybrid bond in the second quarter. Total and OMV AG, a smaller company, were able to issue bonds at close to pre-COVID-19 spreads in May and June respectively, having raised funds in April at significantly wider spreads. Total has since also followed BP’s lead and tapped the hybrid bond market with a EUR 1 billion issue. OMV has said it also plans to issue EUR 1.25 billion in hybrid bonds.

The pandemic is proving to be a not just a one-off shock to the sector but also an amplifier of pre-existing trends and possibly the catalyst for shifts in consumption of oil-based products. The overall impact on oil and gas demand is mixed, if not unclear, in the short to medium term. Heightened demand for plastic-based products in the health sector and possibly future greater of use of private cars contrasts with the collapse and likely slow recovery in demand for air travel, and with it, jet fuel.

The long-term impact will be mainly driven by environmental considerations (not only regulation, but also consumer consciousness and habits) resulting in lower demand and with it lower energy prices and margins. This has led to large asset write-downs at some oil majors such as Shell, BP and Total. This has mainly been in their exploration and production divisions, but refinery plants have also been affected.

While cutting back on capex, the IOCs continue to favour investment in renewable energy projects and diversifying their business models as environmental regulations harden. Take Total’s Q2 acquisitions of a 51% stake in the Seagreen 1 North Sea offshore wind project and a portfolio of residential electricity and gas customers in Spain.