by Veselin Valchev: Friday, 19 Feb 2016
Credit ratings agency Fitch downgraded Royal Dutch Shell Plc (LON:RDSA) by one notch to “AA-“, with a negative outlook, in response to the successful completion of the costly BG Group merger. The agency considers that adding BG’s business to the group has “deteriorated” Shell’s financial profile.
The £36bn takeover included a £13bn cash component, which Shell covered with resources at hand. The Anglo-Dutch oil major said in its Q4 results earlier this month that it had $31.75bn in cash or cash equivalents in reserve at the end of 2015.
Shell plans to restore its balance sheet strength with an ambitious $30bn disposals programme, in addition to cutting billions in capex and opex from the combined group’s spending, while further synergies from the merger are projected to save up to $3bn per year.
However, Fitch noted that following the merger and under current Brent price assumptions, Shell’s from operations (FFO) net adjusted leverage will peak at end-2016 at about 2.5x. Although the ratio is expected to climb to the upper end of the AA- range at 1.9x in 2018-2019, the agency also flagged concerns over Shell’s divestment programme, cost cuts, shareholder payouts as well as the scale and timing of announced share buybacks from 2017.
“The Negative Outlook reflects risks stemming from Shell materially missing the targeted level of asset disposals in a competitive market environment, expectations of fairly stable dividend payouts, increase in leverage due to recurring negative free cash flow (FCF), lower oil prices and weaker cash generation,” Fitch said. “We estimate that further capex and opex cuts might be needed for Shell to preserve its ‘AA’ category credit profile if the group is unsuccessful in meeting its asset disposal goals.”
Fellow ratings agency Moody’s has Shell on “Aa1” with a possible downgrade, while earlier this month Standard & Poor’s downgraded the oil major to A+ and put the rating on negative outlook.
Shell’s share price had inched 0.06 percent lower to 1,588.00p as of 09:36 GMT today, broadly in line with the FTSE 100. So far this week, the stock has added about four percent, while year-on-year shares are down 25 percent.
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