S&P Downgrades 3 European Oil Majors

After revising its crude oil market price assumptions in January, rating agency Standard & Poor’s on Monday lowered its corporate credit ratings on three of Europe’s largest oil & gas companies. The three are BP plc (NYSE: BP, Total SA (NYSE: TOT), and Statoil ASA (NYSE: STO).

Saying that current and expected debt coverage is likely to remain lower than its ratings guidelines for two or three years, S&P assigned new ratings and outlooks to the three oil companies:

• Lowered the long- and short-term corporate credit ratings on BP PLC to
  ‘A-/A-2’ from ‘A/A-1’ and assigned a stable outlook;
• Lowered the long- and short-term corporate credit ratings on Total S.A.
  to ‘A+/A-1’ from ‘AA-/A-1+’ and assigned a negative outlook; and
• Lowered the long- and short-term corporate credit ratings on Statoil ASA
  to ‘A+/A-1’ from ‘AA-/A-1+’ and assigned a stable outlook. We also
  lowered the long-term ratings on captive insurer Statoil Forsikring AS to
  ‘A’ from ‘A+’. The outlook on both entities is stable.

All three firms were removed the ratings agency’s CreditWatch negative roster. The ratings report continues:

Actual and forecast financial results in 2015 and 2016 show metrics below our previous
rating thresholds, except for Statoil whose metrics were in line with the rating level for 2015 (based on preliminary data). Our analyses explicitly factor in our projections for 2016, 2017, and 2018. Moreover, although we do forecast a recovery over this period, the return of metrics to levels consistent with the previous ratings is no longer likely, in our view.

We see the decision to cut investment and increase debt to facilitate shareholder distributions as negative from a credit perspective, because the reduction in investment will affect future cash-generating assets, although we acknowledge that part of the cuts is a result of cost deflation.

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The one-notch downgrade means that the companies’ debt financing costs will rise because they will have to pay investors more to accept their bonds. S&P implies, but does not say explicitly, that the only way out for these companies—and smaller ones like Marathon Oil Corp. (NYSE: MRO) which we looked at earlier today—is for oil prices to rise and stay there.