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Europe’s Big Oil To Tackle Huge Debt Problem

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Europe’s three biggest integrated oil and gas companies—Shell, Total, and BP—have recently reported second-quarter and first-half figures that suggest they had passed the bottom of the cycle in terms of profit margins and are on track to reduce their huge debts, Fitch Ratings said in an analysis on Thursday.  

Driven by higher oil prices compared to last year’s, as well as by higher output and ongoing cost cuts, all three companies reported better results, although cash flows and plans for using the cash varied, Fitch noted.

Total’s priority is repaying debt, BP is more focused on dividends, while Shell is somewhere in between, according to the rating agency.

Shell generated “free cash flow (FCF) of nearly USD2.9 billion in 1H17, before USD6.8 billion in disposals, well ahead of peers. Consequently, Shell shed nearly USD7 billion in net unadjusted debt and paid USD1 billion more in total cash dividends in the period,” Fitch noted.

The reduction of debt was in line with Shell’s plans and with Fitch’s forecasts. Although Shell is expected to lower its net leverage due to its US$30-billion disposal plan, its high debt load carries risks that include lower-than-expected oil prices, high cash dividends, or renewal of share buybacks—all seen as possibly delaying the pace of the debt reduction, according to Fitch.

Related: The Secret Behind Better Oil Major Earnings

BP and Total, unlike Shell, booked negative post-dividend FCF in the first half of the year. While Total managed to cut net unadjusted debt by US$1.8 billion in the first half, BP’s net debt rose by almost US$3 billion, due to additional US$4.3 billion in payments related to the Deepwater Horizon disaster. But those payments will begin to decline next year, Fitch says, and expects asset disposals of US$4.5 billion-US$5.5 billion this year to help BP cut its FFO adjusted net leverage to 3x at end-2017 from 3.4x at end-2016.  

Global oil majors posted stronger figures this past quarter, and are realigning their strategies to the world of US$50 oil price – away from mega projects and on to smaller, smarter, and more profitable ventures.

By Tsvetana Paraskova for Oilprice.com

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