S&P Global Ratings warned this week it could very soon downgrade the ratings on some of the world’s biggest oil firms, citing increased risks coming from the energy transition, price volatility, and weaker profitability. S&P Global Ratings placed the ratings on nine oil and gas majors and their subsidiaries on CreditWatch with negative implications, expecting to resolve the CreditWatch placements within a few weeks. The companies under CreditWatch negative include Exxon, Chevron, ConocoPhillips, Shell, Total, Canadian Natural Resources, and China Petroleum & Chemical Corp.
S&P also revised its outlooks on BP and Suncor Energy to ‘negative’ from ‘stable’.
The credit rating agency has revised its industry risk assessment to ‘moderately high risk’ from ‘intermediate risk’, due to the challenges the energy transition poses to those companies, the pressure on the firms’ return on capital, and the volatility in oil and gas prices.
“We see these factors as more material for ratings now than they were previously,” S&P Global Ratings said in its note.
The higher risk for the industry is not expected to result, in most cases, in a more than a one-notch downgrade.
“This said, we cannot exclude a combination of the industry risk revision and other material factors leading to a two-notch downgrade, especially given the potential for negative surprises after the COVID-19 impacts in 2020,” the rating agency noted.
S&P last downgraded an oil major in March 2020, when it cut the rating on ExxonMobil to AA from AA+ and downgraded the outlook to ‘negative’ from ‘stable’ to reflect the possibility of another downgrade “if the company does not take adequate steps to improve cash flows and leverage over the next 12 to 24 months.”
The other U.S. and European oil majors haven’t been downgraded by S&P since the previous oil industry downturn in 2015-2016.
Moody’s, for its part, said in November that the expansion of European oil majors into utilities is set to have a credit positive impact in the longer term as “it will improve chances of keeping social license for oil and gas companies.”