LONDON (ShareCast) - (ShareCast News) - Weak oil prices in 2016 will leave five of seven large European oil companies with financial leverage above the level Fitch Ratings normally considers appropriate for their current ratings, by a median of 0.6x, according to the ratings agency's latest financial forecasts.
In a note to clients on Monday, Fitch said one such year is unlikely to result in negative rating action, but "a slow recovery in oil prices would mean several companies would have to take very significant steps if their credit profiles are to become appropriate for their current ratings by 2018".

Fitch's initial forecasting, using a $45 per barrel oil price assumption for 2016, and $50 and $55 for subsequent years, indicates that Total would need to make the biggest cuts to discretionary expenditure (capital expenditure and shareholder returns) to maintain its rating profile under this scenario.

"Discretionary items would need to fall by around a third compared to 2015 levels under our current base case to bring FFO adjusted net leverage below the 2.0x guideline for its 'AA-' rating by 2018," the agency said.

This assumes Total is successful in its disposal plans, which, as at many oil majors, are intended to bridge the company's adjustment to lower oil prices and help cover the dividend. If it is not, the cuts to discretionary expenditure cuts would have to go up to 44% compared with 2015.

Fitch also noted that should disposals prove challenging, Shell (AA/Rating Watch Negative) would need to cut its discretionary expenditure deeply too - by 49% with zero disposals - to maintain ratios in line with its current rating by 2018.

The oil major currently aims for $30bn of disposals from 2016 following the BG Group acquisition, which the market assumes will go ahead. The Rating Watch reflects the risk the BG deal presents to the rating in the current environment, although Fitch believes it will be positive for Shell's business profile in the long run.

Commenting on the direction of the oil price itself, Alex Griffiths, Manging Director at Fitch Ratings said, "Our $45 oil price deck reflects our expectation for some price recovery in the second half of this year as the market nears balance. We expect to update these forecasts shortly following release of the companies' results, which should give us more insight into how they plan to deal with the further drop in oil prices."

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