Shell's credit rating is downgraded by Fitch after BG takeover

[NEW YORK] Royal Dutch Shell Plc's credit rating was cut by Fitch after Europe's biggest oil company used some cash reserves to pay for the acquisition of BG Group Plc.

The oil producer's long-term credit rating was cut one notch to AA- from AA, with a negative outlook, Fitch said in a statement on Thursday. Shell's debt to equity level will remain high after the deal and will not be covered by the company's improved performance from oil and gas sales following the BG purchase, the rating agency said.

The world's biggest oil companies have had their credit ratings cut or threatened by rating agencies following the more than 70 per cent slump in crude since the middle of 2014. For Shell, paying for BG is putting an additional burden on its balance sheet at a time companies are trying to preserve cash and reduce debt levels. Shell says the purchase of BG will add to its cash flow at any oil price.

The purchase of BG will take Shell's gearing - the ratio of net debt to equity - above 20 per cent from 14 per cent at the end of last year, Chief Financial Officer Simon Henry said this month. Gearing in the mid-20s is the highest the company would like to go, he said. A credit downgrade can increase the cost of borrowing for companies.

Shell is planning to cut capital expenditure, reduce operating costs and lay off workers following the completion of the BG acquisition to help it ride out to oil price collapse. The company also plans to sell US$30 billion of total assets in three years to help generate cash.

More spending cuts "might be needed for Shell to preserve its AA category credit profile if the group is unsuccessful in meeting its asset disposal goals," Fitch said in the statement.

Fitch estimates Brent will average US$45 a barrel this year and US$55 in 2017. The international benchmark traded at US$34.70 a barrel at 5:27 pm in London.

The slump in prices resulted in Moody's placing more than 100 energy companies, including Total SA and Statoil ASA, on review for possible downgrade. S&P this month downgraded Chevron Corp for the first time since 1987 and assigned a negative outlook to Exxon Mobil Corp, BP Plc, Eni SpA, Repsol SA, Statoil and Total.

BLOOMBERG