By Yemisi Izuora/Ijeoma Agudosi-Lagos
Major oil companies may find 2015 a more difficult year to do business just as Rating Agencies expresses concern about their capability to sustain their envisaged growth vision.
The sudden fall in the price of crude oil, from $120 to just $60 a barrel in six months, is reportedly the biggest economic shock of 2014 and the fallout is expected to be profound and long-lasting, especially for the oil majors.
Standards & Poor (S& P) had outlined three key concerns around a group of the industry’s biggest European producers which include Shell, Total, BP, Eni and BG Group.
S&P said the dramatic deterioration in the oil price outlook had prompted the agency to take a number of rating actions on the European oil and gas majors.
The agency raised a number of concerns including the debt levels of the big oil producers, which have increased 50pc since the global financial crisis erupted.
The first major concern is the debt levels, which have jumped from a combined $162.9bn (£105bn) for the five companies at the end of 2008 to an estimated $240bn in 2014.
Secondly is that while borrowings have risen, dividends have also jumped, leading to “a very substantial cash flow deficit”, S&P said.
The last issues are costs and capex which the agency observed have increased materially.
The ratings agency according to an article published by the UK Telegraph,has revised the outlook on BP and Shell to negative. It also took similar action on Italy’s Eni. BG Group and France’s Total were placed on “CreditWatch”,
On BP, the ratings agency said “the outlook revision to negative reflects our concern that in 2015-16, cash flow generation might come under pressure”. It also said it could downgrade the company in the next six to 12 months if its debt profile deteriorated.
It said Shell’s cash flow could be “significantly affected” by the lower oil price and the company was constrained by “hefty capital spending” and a fixed dividend payout.
The ability of the biggest companies to withstand the oil price collapse depends on the extent to which they can reduce expenses, capital investment and dividends, the agency said.
Its forecasts assumed a Brent oil price of $70 per barrel in 2015, $75 in 2016 and $85 thereafter.