The credit outlook for the integrated oil and gas sector in 2020 has worsened to negative from stable, with oil prices set to average well below US$50 a barrel this year – even if Russia and Saudi Arabia ultimately agree to extend their oil output deal.

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Expectations that oil prices might average around US$60/barrel this year had already taken a severe knock as the near-term economic impact of the coronavirus outbreak on global economic growth and oil demand has turned out to be more severe than expected. While in January the International Energy Agency (IEA) forecasted growth in global oil demand at around 1.2 million barrels per day (mb/d) in 2020, it currently expects a decline of 0.1mb/d, for the first time since the global recession 2009.

 

Price war between the world’s swing producers

 

Collapse of the production agreement between Saudi Arabia-led OPEC and Russia – which had stabilised oil prices in recent years – could now lead to a sustained period of low prices unless Riyadh and Moscow put aside their differences quickly and agree on longer and deeper production cuts compared with the deal which expires at the end this month.

 

“The price war has introduced huge extra uncertainty into oil markets considering that Saudi Arabia and Russia are the world’s swing producers,” said Marlen Shokhitbayev, oil and gas sector analyst at Scope, Europe’s leading credit agency. “We do not think that Russia and Saudi Arabia can tolerate such low prices for long,” he remarked, noting that the IMF estimated the fiscal break-even oil price that Saudi Arabia needed to balance its budget at around US$83/barrel last October.

 

Oil prices fell by as much as 30 per cent after Saudi Arabia threatened last Friday to raise crude output and sell it at discounted prices. On Monday, Brent crude futures fell as low as US$31, with US WTI down as low as US$27, before recovering slightly.

 

“Pressure on balance sheets will rise”

 

“For the integrated oil and gas sector, the immediate impact is that oil prices are set to trade well below levels at which the companies generate free cash flow after paying dividends to shareholders,” advised Mr Shokhitbayev.

 

Scope estimates the break-even oil price for the industry after dividends in 2020 at around US$50/barrel, a slight improvement from 2019.

“Pressure on balance sheets will rise, with the likelihood that the companies will adjust their financial policies accordingly to protect their credit ratings,” said the Scope analyst.

 

“We would expect companies in the near term to end or postpone share buybacks and take on moderate amounts of debt to sustain capital expenditure while conserving cash,” he advised, adding that companies might also propose scrip dividends as an alternative to cash payments to shareholders.

 

Scope analyses the five supermajors – BP PLC, Chevron Corp, Exxon Mobil Corp., Royal Dutch Shell PLC, Total SA – and the large and medium-sized Europe-based integrated producers: Eni SpA, Equinor ASA, Galp Energia SGPS SA, MOL Hungarian Oil and Gas plc, OMV AG, and Repsol SA.