Do European oil majors adjust to low prices?

Do European oil majors adjust to low prices?

Shell, Total and British Petroleum are adjusting their operations to match the realities of an under-$60-barrel price in the long run, according to a new Fitch Ratings report.

The European oil majors are lowering dividends and spending to minimize breakeven points last year, Oil Price reported.

"The companies all generated neutral-to-positive free cash flows in 2017 after dividends, before mergers and acquisitions," according to their recently released annual results. 

"Developments in their credit quality will largely depend on their ability to preserve financial flexibility, as oil prices are likely to remain volatile.”

The Brent barrel averaged $55 last year, allowing the companies’ free capital to range from -$0.50 to $6.60 a unit, depending on the company. The upward shift is a major improvement compared to previous years.

Even when barrel costs stood above $100—majors’ expenditures would cause the capital spread to vary between -$14 and -$3 per unit. The market crash has forced large corporations to cut excessive spending by refocusing efforts in the downstream and petrochemical sectors and enforcing scrip dividends.

"This should allow integrated oil companies to generate neutral-to-positive free cash flows through the cycle under our price deck assumptions, which supports their current ratings," Fitch said.

"We doubt that current prices will be sustained. Our base case is that the Brent price will fall from current levels and stabilize in the $50-60 per barrel range, as US shale production is set to increase further," Financial Tribune cited the report as saying.

BP expects the Brent barrel to reach a $50 average price in 2018 and reduce further to $35-40 by 2021, before a further nosedive to $30.

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