EMEA Oil and Gas Firms to Maintain Robust Free Cash Flows: Fitch

EMEA Oil and Gas Firms to Maintain Robust Free Cash Flows: Fitch
Fitch expects prices to moderate but still sees robust cash in the near term for most EMEA oil and gas firms.
Image by Suppachok Nuthep via iStock

Oil and gas companies in the Europe, Middle East and Africa regions have their financial profiles supported by strong free cash flow (FCF), according to a news release by Fitch Ratings.

According to the report, the low net leverage and high cash buffers of European oil majors provide “flexibility for a strategic shift to achieve their energy-transition and security of supply ambitions”, as high oil and gas prices enabled strong earnings and revenues for companies in the sector last year. Prices should continue to moderate, but most EMEA oil and gas firms should be able to maintain robust FCF “in the near term”.

The ratings agency said it does not expect substantial increases in capital expenditures and non-organic investments in the near term beyond the companies’ existing guidance. It expects firms with low capital intensity and low leverage such as Neptune Energy Group and Harbour Energy to achieve growth by looking at mergers and acquisitions, subject to availability of potential targets.

Based on data released by Fitch, Shell led oil majors in the EMEA region with FCF of $31.2 billion in 2022, followed by BP with $22.9 billion, TotalEnergies with $19.8 billion, and Eni with $5.07 billion. According to an earlier report, the four oil majors achieved record earnings due to high hydrocarbon prices and downstream profitability, which supported their low leverage. However the agency expects prices to normalize and focus to shift to new considerations such as capital allocation and cost discipline.

With most oil and gas companies boosting their shareholder returns last year, Fitch Ratings viewed these moves as credit neutral, as long as the distribution strategies were “balanced” against capital expenditure needs and leverage remaining.

For the first quarter of 2023, Shell announced an interim dividend of $0.2875 per ordinary share, while BP announced its Q1 dividend at 6.610 cents per ordinary share.

Energy Transition Targets

Meanwhile, soaring oil and gas prices, record earnings in traditional upstream businesses and lower returns in low-carbon businesses may test the EMEA oil majors’ commitment to the energy transition, Fitch said in an earlier report.

As examples, Fitch said that BP reduced its decarbonization pledges to 25 percent by 2030, down from its previous 40 percent target, while Shell may also revise its target for reducing its hydrocarbon production gradually. However, the agency said that the oil majors’ investments in low carbon energy should increase in the long term, brought about by climate-neutral targets in the European Union and other regions.

In its most recent progress report on energy transition, Shell said it continues to make progress towards its target of “becoming a net-zero emissions energy business by 2050”. The company highlighted its significant investments in liquified natural gas as part of its transition strategy, because of its “role in reducing emissions from power generation and transport”.

To contact the author, email rteodoro.editor@outlook.com


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