London-09 April 2018: Most oil and gas (O&G) companies in the EMEA region have managed to significantly reduce costs and would retain Stable Outlooks if oil prices retreat below USD60/bbl, Fitch Ratings says. The potential fall in oil prices and its consequences for O&G ratings in EMEA region are one of the key topics we discussed with investors and industry participants in the recent round of Fitch-organised conferences and roundtables, and in one-to-one meetings.
Most O&G producers in the region have broadly adjusted to the USD50-60/bbl scenario – hence the Stable Outlooks for most companies in our portfolio. European oil majors reported broadly neutral to marginally positive free cash flows (FCF) in 2017 when Brent averaged just USD55/bbl, as their cost-cutting measures took effect. Russian oil producers also feel comfortable at this level because a weaker rouble and progressive taxation have smoothed the volatility of their cash flows. The picture is more complicated for high-yield upstream players, as much depends on individual circumstances.
The production deficit in 2017 helped consume a significant part of excess oil inventories and sent Brent prices above USD60/bbl. However, this may not last through 2018 as we expect US shale oil production growth to continue due to further efficiency gains and higher activity. We believe the market will return to a moderate surplus, partially reversing inventory reductions and bringing prices back to USD50-60/bbl. In addition, we are sceptical over OPEC-plus’s ability to control prices in the long term. The price assumptions we use in our forecasts are USD57.5/bbl for Brent and USD55/bbl for WTI. We expect these levels to persist over the next few years.
Other topics discussed with investors include the ramp-up of US LNG projects and its consequences for the natural gas supply-demand balances and Russia’s Gazprom PJSC (BBB-/Positive), our expectations for European downstream O&G and the reasons why Fitch rates some Russian O&G companies above the sovereign rating. These and some other topics are discussed in Fitch’s report ‘What Investors Want to Know – EMEA Oil and Gas’ published today, which is available at www.fitchratings.com.