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Analysts: Low prices to weigh on European oil majors in H2 despite new projects

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Analysts: Low prices to weigh on European oil majors in H2 despite new projects

The startup of new, more profitable projects, rising production and improved downstream results should help drive healthy financials for the top European majors in the second half of the year, however, sluggish oil and natural gas prices could continue to weigh on metrics as well, analysts said.

"Low gas prices will continue to have a negative effect on European majors' profit and cash flow generation in 2H19," Fitch Ratings wrote in a Sept. 6 news release.

While spot gas prices declined in many regions in the first half of the year, revenue and profits at BP PLC, Royal Dutch Shell PLC, TOTAL SA and Eni SpA benefited from positive differences between spot gas prices and realized, or sales, prices, the rating agency said.

If spot natural gas prices remain low in the medium to long term, Fitch said these four companies are likely to adjust their discretionary spending capital expenditures, dividends and share buybacks to help preserve their credit profiles.

Meanwhile, the addition of new projects with higher free cash flow generation potential will again work to boost production and support earnings at the European majors in the second half of the year, analysts said.

In the second quarter, BP proved to be the outperformer among the top majors and the only one to see normalized earnings per share top analysts' estimates. BP's second-quarter earnings were pushed higher in part by a surge in U.S. output following its $10.5 billion purchase of shale assets from BHP Group in late 2018.

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"We maintain our view that major project start-ups and the consolidation of BHP's U.S. shale assets will provide tailwinds to top-line growth in the second half of the year," analysts with CFRA said in an Aug. 31 report.

The CFRA analysts said revenue at Shell in the first half of the year was down 6% due to a combination of weaker oil and gas prices, a downturn in the petrochemical markets and upstream and downstream operational issues.

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"We believe that resolution of those issues and sustained hydrocarbon production growth in the upstream should result in improved top-line momentum during the second half of the year," CFRA said. But taking into account an overall expected drop in the year's average crude oil price, the analysts are still projecting a drop of about 5% in Shell's reported sales for the whole year.

While not impacting underlying performance, Fitch said the new lease accounting standard IFRS 16 also should continue to boost EBITDA at the four European oil majors. The ratings agency estimated that EBITDA at Shell and Eni would have declined during the first half of the year without the standard.