Credit Outlooks for the EMEA oil and gas portfolio remain stable despite some high profile names such as ENI Spa, Total SA and BG Energy Holdings having their Outlooks revised to Negative from Stable. This was mainly due to company specific problems rather than broad based sector weakness. It is worth highlighting, however, that more than 80% of issuers in Fitch’s EMEA oil and gas portfolio have Stable Outlooks and the number of Positive Outlooks doubled since 2013 to 5% from 2.5%.
Our outlook for sector developments remains stable from 2013, but geopolitical tensions place upward pressure on oil prices that benefit issuers. Revenue growth for Fitch rated western European oil companies contracted 0.5% in 2013 and we anticipate aggregate revenues may contract again in 2014 absent higher oil prices.
Heightened geopolitical tension in Iraq, however, has re-introduced the “fear premium” into oil prices. The Institute of International Finance says that a rise in oil prices to USD135 per barrel over two quarters would shave 0.3% off global GDP growth. Under this scenario, Fitch calculates that EMEA oil sector revenue growth could approach 10%-15% by 2015. This would likely change our sector outlook to positive from stable, although based on a ‘through the cycle’ view of oil prices would probably leave the rating outlook as stable.
Fitch anticipates industry operating costs for things like equipment, facilities, materials and personnel (both skilled and unskilled), will continue the upward trend that accelerated in 2010 as demand for these products and services remains steady. Combined operating expenditure of the seven western European upstream and integrated companies we rate was around USD37.8bn in 2013 and Fitch anticipates this could rise to USD39bn in 2014, a 3.25% year-on-year increase.
The European majors have all guided capex spending lower in 2014 as a previously intensive investment stage ends and they reduce the pace of growth in investments. For example Shell will reduce upstream spending in 2014 whilst Total winds down its peak organic investments. Fitch still anticipates western European upstream and integrated companies to reduce capex in 2014 by around USD7bn or 5.2% from 2013 levels.
Actual capex spending in 2014 exceeding 2013 could signal project stress and cost over-runs.
The full report, “2014 Mid-year Outlook: EMEA Oil and Gas ” is available at fitchratings.com.
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