Shell’s recent decision to return to paying its dividend entirely in cash could put pressure on BP & Total to follow suit, but this would be unlikely to result in negative rating action for either company, Fitch Ratings says. Both BP & Total have more headroom at their current rating than Shell. We affirmed Shell at ‘AA-‘ with a Negative Outlook after its announcement, as the plan will slow its deleveraging.
Shell, Total & BP introduced scrip dividend programmes when oil prices collapsed in 2014-2015, rather than cutting gross dividends. This helped them balance cash flows and reduce additional borrowing. Shell said last week that will cancel its scrip programme for 4Q17 and could start share buybacks or even raising dividends. This could result in worse credit metrics than we currently project.
Total & BP have remained cautious, but Total has promised to cancel the scrip dividend discount, which will make scrips less attractive to shareholders and BP has resumed its share buyback programme. although volumes are likely to be minimal in the next two years under our base case scenario.
If both companies were to completely cancel scrip dividends from 2018, Total’s (AA-/Stable) funds from operations (FFO) adjusted net leverage would be 1.7x in 2009, compared to the 2x at which we would consider a downgrade. BP’s (A/Stable) net leverage would be 2.6x under this projection compared to our 3x negative rating action guidance. It would therefore probably take significantly more shareholder friendly actions, such as very large share buybacks or raising dividends, as well as raising capital intensity, for the ratings of Total & BP to come under significant pressure.
Shell’s Programme saved it around $11bn of cash as shareholders on average elected to receive 31% of total dividends in shares. In addition, Shell has reiterated its commitment to buyback at least $25bn of shares in 2017-2020, subject to a sustained recovery in oil price and debt reduction. The company used oil prices at USD 60/bbl as a reference point for its plans in its latest investor day presentation.
We view Shell’s decision as credit negative as it will reduce the company’s financial flexibility under our base case of oil price returning to below USD 55/bbl in 2018 and refining margins moderating. However, the company’s strong recent free cash flow generation and progress with asset disposals mean we still expect to fall back to a level commensurate with its ‘AA-‘ rating by end-2019