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Oil Majors Downgraded by Moody's on Price Plunge

Some of the world’s biggest oil and gas producers had their credit ratings downgraded by Moody’s Investors Service last week. The U.S. rating agency’s action on Chevron Corp. CVX, Royal Dutch Shell plc RDS.A and TOTAL S.A. TOT is based on the ‘lower for longer’ crude price expectation and the resultant debt concerns.

Why the Downgrade?

The Moody’s action comes in the wake of oil’s horror show that has seen prices come down from $110 per barrel in mid-2014 to around $40 now, in between falling to a 12-year low of $26.21 in Feb. The commodity’s collapse has threatened the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.

Moreover, weak realizations limit the companies' internally-generated cash flow amid high capital spending and dividend payments (if any). What’s more, the outlook remains grim too, with fundamentals suggesting that the odds are firmly stacked against a sustained crude rally. As per Moody’s, things are expected to turn around only in 2018.

Let’s discuss the downgrades in brief:

Chevron: The Zacks Rank #3 (Hold) U.S. oil major’s credit rating was reduced by a notch to Aa2 – the third-highest grade – from Aa1. Moody’s believes that as a result of persistently low oil prices, Chevron will generate negative cash flow in the midst of rising debt in 2016 and 2017.

Royal Dutch Shell: Europe’s largest oil company Royal Dutch Shell’s rating was also brought down to Aa2, from Aa1. The New York-based Moody’s felt that Shell’s $50 billon BG acquisition will increase the group’s leverage. Shell carries a Zacks Rank #5 (Strong Sell).   

TOTAL S.A.: Moody’s cut French integrated major TOTAL’s rating by two levels to Aa3. The Zacks Rank #3 company’s operating cash flows and credit metrics would remain under stress with oil likely to stay down in 2016 and 2017, Moody’s said.

However, British energy giant BP plc BP saw its rating intact at A2. Moody’s is of the opinion that BP’s credit metrics and business profile are better than its peers. Moreover, the Jul 2015 settlement of a host of civil/criminal claims associated with the Deepwater Horizon incident has also eased the overhang on the Zacks Rank #5 stock.

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BP PLC (BP): Free Stock Analysis Report
CHEVRON CORP (CVX): Free Stock Analysis Report
TOTAL FINA SA (TOT): Free Stock Analysis Report
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis Report
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