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Big Oil Raises Debt To Ride Out Price Crash

Tsvetana Paraskova

As prices crashed, the supermajors resorted to one of the last tools they have before starting to potentially consider the painful idea of cutting dividends, taking on more debt

International oil majors reacted within days to one of the biggest and fastest oil price collapses in recent history. All slashed capital expenditure (capex) guidance, vowed to reduce operating costs, and suspended share buybacks.  

But that wasn’t enough. So the supermajors resorted to one of the last tools they have before starting to potentially consider the painful idea of cutting dividends. This tool is tapping the bond markets for money to plug cash shortfalls at $30 oil.

Total, Royal Dutch Shell, Equinor, and OMV of Austria raised a combined more than $10 billion on the bond markets this week alone, according to Reuters estimates.  

Norway’s Equinor alone raised $5 billion in fresh debt to reduce the adverse impact of the oil crisis.

“Equinor is in a strong position to handle market volatility and uncertainty. In combination with our USD 3 billion action plan to reduce cost, this transaction will further strengthen our financial resilience and flexibility going forward, and ensure liquidity to prioritised projects,” chief financial officer Lars Christian Bacher said.

Before tapping the bond market, Equinor had suspended share repurchases of its $5-billion program launched just half a year ago. Shell and Total also suspended their respective ongoing buyback programs.  

This week, Shell announced a new $12 billion revolving credit facility commitment, in addition to the $10 billion credit facility signed in December 2019.

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“Together with cash and cash equivalents of circa $20 billion, available liquidity will rise from $30 billion to more than $40 billion,” Shell said, at the same time warning about its post-tax impairment charges of $400-800 million in Q1 because of the price crash.

Following the price collapse and Big Oil’s rising debt with cash flow constrained, and with some majors—negative even before the crash, rating agencies started to downgrade the oil majors.

U.S. supermajor ExxonMobil, for example, lost its triple-A rating at Moody’s, after the agency downgraded on Thursday its rating for Exxon to Aa1 from Aaa, with the outlook remaining “negative.”

“ExxonMobil was generating negative free cash flow and weakly positioned within its Aaa rating prior to the collapse in oil prices,” said Pete Speer, Moody’s Senior Vice President.

“While we expect the company to reduce capital spending and operating costs, continued negative free cash flow and rising debt levels even in a recovery raises the risk of a further downgrade to its ratings,” Speer added.

At this point, a return to the triple-A rating is unlikely in the adverse conditions for the industry, Moody’s noted. To deserve an upgrade, Exxon would have to significantly cut debt and become resilient to increased oil price volatility in the energy transition, the rating agency said.  

A day before that, Moody’s had changed Shell’s outlook to “negative” from “stable”, although it affirmed the Aa2 rating. 

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“Changing the outlook on Shell’s ratings to negative reflects the material impact that the collapsing oil and gas prices will have on the company’s financial profile in 2020. While we expect that Shell's strong liquidity and financial flexibility as well as a normalisation of oil and gas prices will support a recovery of its credit metrics in 2021-22, we consider it less certain whether our requirements for an Aa2 rating will be met over the next 12-18 months,” said Sven Reinke, a Moody’s Senior Vice President.

Rising debt and negative cash flows could put pressure on the supermajors to begin considering dividend cuts, especially if $30 oil persists for more than one quarter or two. According to Wood Mackenzie’s corporate analysis team, Big Oil’s average corporate cash flow breakeven for 2020 is $53 a barrel Brent, and balance sheets are not ready for an extended period of low oil prices.  

Although the economic recession and even depression could be “a good time to bury bad news”—such as potential dividend cuts, “It’s not a decision the Majors will take lightly or, for that matter, quickly,” WoodMac’s Chairman and Chief Analyst, Simon Flowers, wrote this week.

Big Oil will not rush to cut dividend payouts, yet, but it could consider the so-called scrip dividends—the plan under which investors can choose to be paid in shares instead of in cash. This ‘half-way’ option between keeping unsustainable dividends and cutting the dividend payout would result in “preserving the pay-out, but conserving cash, an option some used with success after the last price collapse,’’ WoodMac’s Flowers says.   

By Tsvetana Paraskova for Oilprice.com

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