S&P Global Ratings said Jan. 26 it is considering downgrading its credit ratings on a number of major oil and gas producers, including ExxonMobil, Shell and Total, to reflect a growing risk to their businesses from the energy transition, price volatility, and future profitability.
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ExxonMobil, Total, Chevron and Shell are among 13 oil companies being placed on "CreditWatch" with negative implications, meaning S&P Global Ratings could downgrade their credit ratings within a few weeks, S&P Global Ratings said in a statement.
The ratings agency said it sees "significant challenges and uncertainties" from the energy transition, including market declines due to the expected growth of renewables and downward pressure on profitability. In particular, it said it sees downward risks to return on capital, as a result of the capital investment levels over 2005-2015 period and lower average oil and gas prices since 2014.
In addition to the credit rating reviews, which include China's national oil giants CNOOC and CNPC, it said it has revised its credit outlooks for BP and Suncor Energy to negative from stable.
"The change in our industry risk assessment for oil and gas E&P and integrated companies reflects our evaluation of increased and likely increasing risks for oil and gas producers," S&P Global Ratings said. "We see these factors as more material for ratings now than they were previously," the agency added.
Global oil majors are being forced to reevaluate the resilience and cost of new oil and gas projects to accommodate weaker demand outlooks and lower long-term prices in the wake of the coronavirus pandemic.
The West's top nine oil majors alone are sitting on more than 28 billion barrels of oil equivalent of undeveloped resources, according to company filings, and low prices in 2020 have already sidelined about a third of global oil and gas investments, raising concerns on the potential for future "stranded assets."
According to the International Energy Agency, some 250 billion fewer barrels of oil and 30 Tcm less gas will need to be developed by 2040 for the world to hit its Sustainable Development Scenario, an outlook compliant with the Paris Agreement to hold the rise in global temperatures to below 2 degrees. Over the same time, surging supplies of renewable energy such as wind and solar will displace demand for oil and gas, the IEA forecasts.
S&P Global Ratings said, in most cases, it does not anticipate downgrading its oil major credit ratings by more than one notch at the end of the review. But a combination of the higher industry risk and potential for "negative surprises" from the COVID-19 pandemic mean two-notch downgrades cannot be ruled out, it said, adding that it does see materially different dynamics for producers of oil compared with gas.
"We are placing on CreditWatch those ratings in which we see industry risks as having the greatest incremental impact on credit quality," S&P Global Ratings said. "These include some of the highest ratings in our oil and gas portfolio, as these companies bear the burden of sustaining the strongest credit quality over time, in the face of current and future industry uncertainties."
Ratings agency Moody's took negative rating actions on five major international oil companies in early 2020 citing risks from the energy transition and a weaker earnings outlook due to lower long-term oil prices.
Since then, Western oil majors have slashed their spending plans by billions of dollars and taken huge writedowns on their upstream assets after reducing their long-term oil and gas price assumptions in the wake of the pandemic. The oil price collapse of early 2020 as travel curbs hit demand has already taken its toll on a number of Western oil companies.
In 2020, the oil and gas sector was the biggest single source of global corporate debt defaults, according to S&P Global Ratings, as the coronavirus pandemic hit earnings and asset values. Driven mostly by companies in the US and Europe, defaults by the oil and gas sector more than doubled to 50 companies, S&P Global Ratings said in early January, predicting that corporate defaults are expected to remain at elevated levels in 2021.