London, WED, APRIL 01 2020-theG&BJournal- Moody’s Investors Service, (“Moody’s”) has today affirmed the Aa2 issuer rating and the (P)Aa2 senior unsecured MTN rating of multinational oil and gas company Royal Dutch Shell plc (Shell) and its guaranteed subsidiaries. The Prime-1 commercial paper rating was affirmed. The outlook on all ratings was changed to negative from stable.
“Changing the outlook on Shell’s ratings to negative reflects the material impact that the collapsing oil and gas prices will have on the company’s financial profile in 2020. While we expect that Shell’s strong liquidity and financial flexibility as well as a normalisation of oil and gas prices will support a recovery of its credit metrics in 2021-22, we consider it less certain whether our requirements for an Aa2 rating will be met over the next 12-18 months.” says Sven Reinke, a Moody’ Senior Vice President.
At the same time, Moody’s has affirmed the Aa2 issuer rating of Shell Finance (Netherlands) B.V., the Aa3 issuer rating of Shell Oil Company (SOC) and the A2 issuer rating of Shell Energy North America (US), L.P. (SENA). All wholly owned subsidiaries of Shell.
According to Moody’s, today’s outlook change reflects Moody’s expectation that Shell’s operating performance will suffer materially from the severe decline of oil prices and the already weak gas prices prior to the current crisis.
‘’This will be partially offset by measures announced by the company to protect earnings and cash flow generation.’’
Shell has announced plans to reduce underlying operating costs by $3 billion – $4 billion per annum over the next 12 months compared to 2019 levels; to lower cash capital expenditure to $20 billion or below for 2020 from the previously planned level of around $25 billion; materially reduce working capital; and stop the next tranche of the share buyback programme. The company expects that these measures will contribute $8 billion – $9 billion of free cash flow on a pre-tax basis.
Moody’s forecasts that these measures will improve the resilience of Shell in a low oil price environment and could enable the company to regain the financial strength the rating agency requires for an Aa2 rating.
‘’Nevertheless, Moody’s expect that Shell’s Moody’s adjusted retained cash flow (RCF) to net debt metric will fall below 20% in 2020 under a $40/bbl WTI ($43/bbl Brent) oil price scenario. The metric is likely to fall under 10% in 2020 under a more severe $30/bbl WTI ($30/bbl Brent) oil price scenario. However, based on the rating agencies assumption of gradually rising oil and gas prices in 2021-22, Shell’s credit profile should recover with the RCF to net debt metric rising towards 25%.’’
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