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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Chevron, Shell, and Total See Credit Ratings Slashed

In a move that shows not even the largest oil companies are well-positioned during the oil price downturn, Moody’s Investors Service downgraded the credit ratings of three oil majors on Friday.

Moody’s cut the credit ratings of Chevron and Royal Dutch Shell by one notch, and cut the credit rating of French oil giant Total by two levels.

Both Chevron and Shell were downgraded to Aa2 from Aa1.

"The downgrade of Chevron to Aa2 reflects our expectations of negative free cash flow and rising debts levels caused by low oil prices in 2016 and 2017," Pete Speer, Moody's Senior Vice President, said in a statement. "The stable outlook is supported by the company's increasing capital spending flexibility and scope for operating cost reductions, which combined with modest rises in commodity prices should allow Chevron to substantially reduce negative free cash flow in 2017 and stabilize its debt levels and corresponding financial leverage as measured against capitalization and proved reserves." Related: The Halliburton-Baker Hughes Merger is Falling Apart. What Happens Next?

Moody’s expects Chevron to have negative free cash flow of $15 billion in 2016, due to persistently low oil prices, plus the company’s insistence on maintaining its shareholder payouts. That comes after $16 billion in negative free cash flow last year. Chevron’s cash flow/net debt ratio is likely to stand between 10 and 15 percent this year and remain below 20 percent through 2017. By 2018, with oil prices rebounding, Moody’s sees Chevron’s outlook improving. Chevron has finished up several large projects – such as the Gorgon LNG project in Australia – which should reduce spending pressure, allowing it to pursue cash flow neutrality in 2017.

Shell was given the same credit rating as Chevron, but instead of a stable outlook, Moody’s gave Shell a “negative” outlook. "The ratings downgrades and negative outlook reflect Shell's elevated leverage following the BG acquisition. We view BG as a strong contributor to Shell's longer term business positioning, but under a low oil price scenario we expect Shell to generate negative free cash flow at least through 2017. Low oil and gas prices will compound Shell's challenges in delivering substantial asset sales to help reduce debt and in integrating and restructuring the upstream portfolio," Tom Coleman, Moody's Senior Vice President, said in a statement.

Shell paid $50 billion for BG Group, which is creating financial pressure today even if it was a smart long-term move. Shell’s cash flow/net debt ratio declined from 55 percent in 2015 to 30 percent this year. Given that picture, Shell has already stated that reducing debt is a top priority for the next few years. Indeed, shareholders are also pressing the company to cut spending after it splurged on BG. Shell is spending $33 billion this year, which reflects the combined Shell-BG spending program, the most out of any oil major and also $10 billion more in spending than even ExxonMobil. "Shell needs to cut capex to give the market confidence that the dividend can be sustained, and grown in future," said Charles Whall, portfolio manager at Investec Asset Management, said in a Reuters interview. Related: BP Shareholders Revolt Over CEO’s Salary

As Moody’s notes, the ability to become cash flow positive in the interim largely depends on the company’s ability to dispose of the $30 billion in assets that it announced, a difficult proposition in today’s environment.

Moody’s cut Total’s rating by two notches from Aa1 to Aa3 with a stable outlook. "The downgrade of Total's ratings mainly reflects our expectation that oil prices will remain lower for longer in 2016-17 and will continue to pressure Total's operating cash flows and credit metrics. All of which is at a time when the company manages a sizable debt position," Elena Nadtotchi, a Moody’s Vice President, said in a statement.

For Total, the story is similar to its peers. Moody’s says Total could have “moderate negative cash flow” over the next few years, which means it will not be able to reduce debt in any substantial way. It hopes to sell off $10 billion in assets and make further spending cuts – capex is down to $19 billion in 2016 from $23 billion in 2015 – but low oil prices will keep up the pressure this year and next. Related: Crude Charging Higher Ahead Of Big Week

Moody’s kept BP’s credit rating stable at the much lower level of A2, but gave the British oil giant a positive outlook following the final court approval of the nearly $20 billion settlement between BP and federal, state and local claims related to the 2010 Deepwater Horizon disaster. That removed some uncertainty from the company’s balance sheet.

For all of the latest ratings, Moody’s provided plenty of caveats. The inability to sell off assets could be a drag on the company’s credit rating. Higher unexpected debt levels or lower-than-expected production would have a negative impact as well. And obviously, much depends on where oil prices go. The current ratings assume that oil and natural gas prices will “only gradually recover through 2018.” If prices rise much quicker, the quality of Big Oil’s credit could improve.

By Nick Cunningham of Oilprice.com

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