Oil majors face ratings cuts, S&P warns

Largest drillers failed to take advantage of high prices during the boom years, report says

ExxonMobil, Chevron and others may see their ratings cut. Matthew Brown / AP

ExxonMobil, Chevron and other oil majors could see their credit ratings slashed again if they fail to cut costs and reduce their growing debt loads in the next year, according to an S&P Global Ratings report.

The world’s largest drillers failed to take advantage of high prices during the boom years before 2014 to repay debt, according to the report published on Tuesday. Instead they embarked on costly investments in new projects and dividends, leaving them unprepared for the painful downturn that ensued.

Now, a weak recovery in oil prices is making it harder to reduce the debt accumulated in recent years. Exxon last year lost the platinum credit rating it held since the Great Depression, and all of its largest rivals, including Total, BP, and Royal Dutch Shell also faced similar reductions. Further downgrades could become more likely later this year or in 2018 if oil prices remain below US$50 a barrel, the report said.

"Instead of deleveraging in the good times, debt levels were actually increasing," said Paul Harvey, an analyst at S&P Global in New York. "When they entered 2015 and 2016, their balance sheets weren’t as in line as they were historically to handle lower prices."

West Texas Intermediate, the US benchmark, closed at $45.04 a barrel in New York on Tuesday. In August 2013, WTI traded as high as $112.24. The prices fell as low as $26.05 in February 2016.

"The modest improvement in oil prices this year reflects the support from the Opec and Russian agreement to constrain production," Simon Redmond, director of corporate ratings for commodities at S&P, wrote in the report. "But it hardly offers a get-out-of-jail-free card for ratings."

S&P warned Exxon seven weeks ago that the explorer’s balance sheet was under strain, degrading the oil producer’s outlook to negative. The rating company said it worried Exxon may “prioritise capital spending, acquisitions or shareholder returns over debt reduction”.

Total, Exxon, and Chevron face the greatest danger of a ratings cut, given their elevated debt loads and lacklustre efforts to curtail investments and dividend payouts. An exception to the trend is Shell, the only company among the five to receive a positive outlook from S&P. Shell outperformed its peers last year, putting it in a better position than its rivals to cut costs as prices remain low.

An agreement by Opec to cut production is proving unable so far to significantly raise prices and diminish a global supply glut. oil companies may choose to prioritise debt reduction by selling off assets and winding down long-term investments, Harvey said. Alternatively, they could seek more acquisitions to lock in profitability at lower prices, such as BP investing in fields in continental Africa.

"The course that companies choose, as much as the oil price, could signal at what level ratings should most appropriately capture the credit risks for these massive groups," Mr Redmond said in the report.