Fitch: BP, Total Have Rating Headroom if Scrip Dividends Ended

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



Kelvin Emmanuel

About Kelvin Emmanuel

The Oil producing Angola in the Southern part of Africa faces what Nigeria faced 12months ago; a distortion in its exchange rate with a difference between the official markets and the parallel black markets. One dollar through the official window buys you 166 kwanza, while one dollar through the black market buys you 400 kwanza. Nigeria faced the same challenge 12months ago, when the distortion between the official and black markets was as much as the official markets trading at 306 with the parallel market ranging from 450 through to 510. The Central Bank Governor of Angola, Jose de Massano Junior announced in Luanda “We will stop having a fixed foreign exchange, we will adopt a floating regime of foreign exchange”. Angola faces exactly the same challenges and has been applying the exact same responses to an exchange rate crisis like using its foreign reserves that was sitting at $26bn to defend the currency kwanza, with no success so far, even though the external reserves has dropped to $14bn. Angola relies on Oil receipts for 80% of its government revenue, 90% of its inflow and 50% of its GDP. Angola is a $194bn economy that has been growing at an average of 10% on the back of rising oil prices since 2002 when its 27 year old civil war that started in 1975 ended. The state national oil company Sonangol reports that it produces up to 1.8m barrels of crude oil daily, however the government that until now has being led by the family dynasty Jose Eduardo dos Santos until recently when succession saw power transferred to Joao Lourenco, reports that the oil price rout in 2015/2016 that saw prices drop to as low as $28 per barrel caused ripples across the economic structures of the government, upsetting government revenues, its ability to fund its budget, capital project funding, foreign direct investments into the economy as a result of a currency crisis that was driven by the widening of gap between the official and street window of the kwanza, that until now has been pegged in a fixed exchange rate regime to the US Dollar.