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 press release from Fitch Ratings.
According to the report, European oil majors’ low net leverage and high cash buffers provide “flexibility for strategic change to achieve their energy transition and security of supply ambitions” as high oil prices and gas made it possible to obtain large profits and income for companies. in the sector last year. Prices should continue to moderate, but most EMEA oil and gas companies should be able to maintain robust FCF “in the near term”.
The rating agency said it does not expect substantial increases in capital expenditures and non-organic investments in the near term beyond the companies’ existing guidelines. Companies with low capital intensity and low leverage, such as Neptune Energy Group and Harbor Energy, are expected to achieve growth by looking at mergers and acquisitions, subject to the availability of potential targets.
According to data released by Fitch, Shell led oil majors in the EMEA region with FCF of $31.2 billion in 2022, followed by BP at $22.9 billion, TotalEnergies at $19.8 billion and Eni at $5.07 billion . According to an earlier report, the four major oil companies posted record profits on 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 increasing shareholder returns last year, Fitch Ratings viewed these moves as credit neutral, provided distribution strategies were “balanced” with the needs of capital expenditure and remaining leverage.
For the first quarter of 2023, Shell announced an interim dividend of $0.2875 per ordinary share, while BP announced its first quarter dividend of 6.610 cents per ordinary share.
Energy transition objectives
Meanwhile, rising oil and gas prices, record earnings at legacy businesses on the rise and lower returns at low-carbon companies may test the EMEA oil majors’ commitment to the energy transition, Fitch said in an earlier report.
As examples, Fitch said BP cut its decarbonisation pledges to 25 per cent by 2030, down from its previous target of 40 per cent, while Shell may also revise its target to gradually reduce its production of hydrocarbons However, the agency said oil majors’ investments in low-carbon energy should increase in the long term, prompted by climate-neutral targets in the European Union and other regions.
In its most recent progress report on the energy transition, Shell said it continues to make progress towards its goal of “becoming a net-zero emissions energy business by 2050”. The company highlighted its significant investments in liquefied natural gas as part of its transition strategy, for its “role in reducing emissions from energy generation and transport”.
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