EMEA Oil Majors to Recover in 2021 on Higher Prices and Volumes

Higher oil and gas prices, increased production volumes and stronger downstream margins in 2021 will help European oil majors to recover from their relatively weak performance in 2020, Fitch Ratings says. 1Q21 financial results support these expectations as the companies reported a sharp qoq improvement in EBITDA and operating cash flow. The European oil majors’ ratings and Outlooks have remained unchanged during the Covid-19 pandemic.

Oil and gas prices have increased from the lows during the pandemic and we expect prices to stay materially above average 2020 levels in the medium term. Higher oil and gas prices and stronger downstream margins in 1Q21 led to a sharp increase in EBITDA and cash flow for European majors after a weak 2Q20-4Q20. BP, Eni and TotalEnergies generated increased EBITDA before the inventory holding effect in 1Q21 compared to 1Q20. Shell’s 1Q21 EBITDA before the inventory holding gain was weaker yoy, we believe partly due to lower realised liquefied natural gas (LNG) prices and restructuring costs.

We expect growth in majors’ oil and gas production in 2021-2022 before the effect of disposals. Global oil consumption should recover to 2019 levels in 1Q22, based on forecasts published by the US Energy Information Administration, while natural gas consumption will exceed 2019 volumes in 2021, according to the International Energy Agency. We believe OPEC+ will substantially relax its oil production quotas in 2022, potentially accommodating higher Iranian production, if the decline in inventories continues.

All four companies are likely to generate positive free cash flow (FCF) for full-year 2021, driven by increased profits, only moderately higher capex and lower dividends for Shell and BP. FCF before changes in working capital increased for the European majors in 1Q21. A combination of positive FCF and disposal proceeds in 1Q21 resulted in BP and Shell reducing net debt through higher cash holdings or early debt repayment.

We expect capex to increase moderately in 2021 after cuts of 25% in 2020 and 12% in 1Q21 (both yoy). However, investment budgets for 2022-2023 will depend on hydrocarbon prices, and we do not expect the increase to be significant. The gradual redistribution of investments from oil towards gas and renewable segments will continue in 2021-2023, before becoming more material in 2025-2030.

We believe Shell, BP and Eni will have some headroom under their leverage guidance in the medium term partly due to dividend reductions during the price downturn, although the companies are already increasing their shareholder distributions. TotalEnergies remains committed to pre-2020 dividend levels and aims to pay dividends fully in cash, leading to weak leverage headroom for its rating.
Source: Fitch Ratings

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