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S&P oil forecast: US$65 (WTI), US$70 (Brent)

Tuesday, January 6, 2015

Standard & Poor’s Ratings Services (S&P) has announced mostly negative rating actions on Europe’s oil majors, most of which operate in T&T. In a recent rating action, S&P changed its outlook on Point Fortin-based Atlantic co-owners Royal Dutch Shell and BP to negative. 

France’s Total SA also had their outlook revised to negative. Italy’s Eni SpA was placed “on CreditWatch with negative implications,” along with BG Energy Holdings. S&P also revised its outlook on Repsol to stable from positive, following the announced cash and debt-funded US$12.9 billion acquisition of Talisman Energy Inc.

“We recently updated our oil price assumptions, revising down our prices for Brent to US$70-$75 per barrel (/bbl) for 2015-2016, while keeping our longer-term 2017 price of US$85/bbl. This reflects the precipitous declines in futures prices for Brent, the result of a combination of weaker demand expectations and relatively unconstrained supply—notably on the back of sustained shale oil production growth in North America,” the agency said.

BHP Billiton, which produces Calypso crude, one of T&T’s local premium blends, had said it fetches a price closer to the UK’s Brent crude.

Similarly, S&P forecast West Texas Intermediate (WTI) prices of US$65/bbl in 2015, US$70/bbl in 2016, and US$80/bbl thereafter, and US Henry Hub gas prices of US$3.95 per million British Thermal Units (mmBTU) in 2015 and US$4.00 mmBTU thereafter.

“As a direct result of these updated price assumptions, we have updated our forecasts, which has resulted in meaningfully weaker credit measures and very substantial negative discretionary cash flows for all European oil and gas majors,” S&P said.

S&P said it has “three concerns for these highly rated integrated oil and gas groups, including Royal Dutch Shell PLC, Total S.A., BP PLC, Eni SpA, and BG Group PLC.”

First, S&P said the companies’ combined adjusted debt for the top five European oil and gas companies was US$162.9 billion at year-end 2008; and in 2014, it forecast debt to be about US$240.4 billion.

“Even after three years with Brent crude oil trading comfortably above US$100/bbl, companies’ free cash flow generation has been weak or negative—even before dividend payments in some cases,” S&P said.

Second, S&P said, dividends have “crept up for the four majors to substantial, effectively fixed, levels. We project a very substantial cash flow deficit in 2015, potentially extending into 2016 as these dividend payments are only partly covered by free operating cash flow. Combined discretionary cash flow, after dividends, was negative US$35.8 billion in 2009 when the Brent oil price dropped on average to US$67/bbl. We currently estimate a potential combined shortfall of about US$30 billion in 2015 under our US$70/bbl price assumption.” 

Third, S&P said, costs and capex have increased materially for producers as oil field service companies have ridden the oil price wave.


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