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Feb 6 (Reuters) - (The following statement was released by the rating agency)
Production shortfalls and strategy changes to appease equity holders are a greater threat to major Western European oil company ratings than a prolonged downturn in crude prices, Fitch Ratings says. A stress test of the sector shows a Brent price of USD55 a barrel would put pressure on credit quality, but compensating movements in cost bases and capex would give most companies a fighting chance at preserving rating levels.
With equity markets increasingly focussed on returns, bond yields near historical lows and oil prices forecast to soften, the chances of companies increasing leverage to benefit equity holders have risen. The European companies that have reported so far this year have generally resisted this pressure - but it may increase as the year goes on.
Production shortfalls have resulted in negative rating actions, and these risks are rising as companies turn to more difficult environments, such as the Arctic, or challenging formations like shale to replace existing reserves. We downgraded BG Energy in July 2013 and revised the Outlook on Eni to Negative in November due to delays and production volatility. These risks can be mitigated in companies with sufficient size and diversification.
Stress testing the sector against the impact of a medium-term drop in Brent crude prices to USD55 a barrel highlights the sector's resilience to falling prices, in part due to companies' flexible cost bases.
Historically, EBITDA margins have remained steady in the face of falling prices and companies have been able to cut capex rapidly. For 'AA' rated Shell and Total, even a prolonged drop to USD55 would leave leverage at fairly conservative levels. Leverage increases for 'A' rated oil majors would be more severe and could lead to downgrades without corrective action. But the chances of a prolonged fall of this size are slim, especially as OPEC and others would probably move to cut supply long before prices fell that far.
For more detail on our stress test and the potential risks to ratings in the sector, see "Stress Testing Western European Oil and Gas Companies," published today at www.fitchratings.com.
Link to Fitch Ratings' Report: Stress Testing Western European Oil and Gas Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=733936