BAKU, Azerbaijan, April 2
By Leman Zeynalova – Trend
Norwegian Equinor's operating performance to suffer materially from decline of oil prices, Trend reports referring to Moody's Investors Service.
Moody's has affirmed the Aa2/(P)Aa2 senior unsecured debt and program ratings of Norwegian oil major Equinor ASA ("Equinor") and its a1 baseline credit assessment (BCA). At the same time, Moody's affirmed Equinor's P-1/(P)P-1 commercial paper and other short-term ratings. The outlook on all ratings was changed to negative from stable.
"Changing the outlook on Equinor's ratings to negative reflects the material impact that the collapsing oil and gas prices will have on the company's financial profile in 2020. While we expect that Equinor's strong liquidity and financial flexibility as well as a normalisation of oil and gas prices will support a recovery of its credit metrics in 2021-22, we consider that it is less certain whether our requirements for an Aa2 rating will be met over the next 12-18 months." says Sven Reinke, a Moody' Senior Vice President.
Today's outlook change reflects Moody's expectation that Equinor's operating performance will suffer materially from the severe decline of oil prices and the already weak gas prices prior to the current crisis. The negative effect will be partially offset by measures announced by the company to protect earnings and cash flow generation. Equinor has announced plans to (i) reduce organic capex for 2020 from $10-11 billion to around $8.5 billion, a reduction of around 20 percent; (ii) reduce exploration activity for 2020 from around $1.4 billion to around $1 billion; (iii) reduce operating costs for 2020 by around $700 million compared to original estimates; and (iv) suspend the share buy-back program until further notice. The company stated that with these measures, Equinor can be organic cash flow neutral before capital distribution in 2020 with an average oil price around USD 25 per barrel for the remaining part of the year.
Moody's forecasts that these cost and capital saving measures will improve the resilience of Equinor in a low oil price environment and could enable the company to regain the financial strength the rating agencies requires for an Aa2 rating. Nevertheless, Moody's expect that Equinor's Moody's adjusted retained cash flow (RCF) to net debt metric will fall under 40 percent in 2020 under a $40/bbl WTI ($43/bbl Brent) oil price scenario. The metric is likely to fall under 30 percent in 2020 under a more severe $30/bbl WTI ($30/bbl Brent) oil price scenario. However, based on the rating agencies assumption of gradually rising oil and gas prices in 2021-22, Equinor's credit profile should recover with the RCF to net debt metric increasing above 40 percent.
At this point Moody's is less certain whether Equinor would be able to regain sufficient financial strength to justify the current Aa2 rating despite the reduced Moody's adjusted debt level of $33 billion at the end of 2019 -- around $13 billion lower than at the beginning of the last industry downturn in 2014. Going forward Equinor will have to balance different priorities including restoring its strong financial profile, continued shareholder remuneration, ongoing investments into its core oil and gas operations and rising investment need for its renewable power business, which is earmarked for exponential growth over the next few years, in order to adjust the company's operations for the energy transition. We will monitor closely whether Equinor will sufficiently prioritise restoring its financial profile in order to maintain the current rating.
Equinor's credit profile is vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company is vulnerable to the outbreak continuing to spread.
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