Our initial forecasting, using a USD45/bbl assumption for 2016 and USD50 and USD55 for subsequent years, indicates that Total would need to make the biggest cuts to discretionary expenditure (capex and shareholder returns) to maintain its rating profile under this scenario. Discretionary items would need to fall by around a third compared to 2015 levels under our current base case to bring FFO adjusted net leverage below the 2.0x guideline for its 'AA-' rating by 2018.
This assumes Total is successful in its disposal plans, which, as at many oil majors, are intended to bridge the company's adjustment to lower oil prices and help cover the dividend. If it is not, the cuts to discretionary expenditure cuts would have to go up to 44% compared with 2015.
If disposals prove challenging, Shell (AA/Rating Watch Negative) would need to cut its discretionary expenditure deeply too - by 49% with zero disposals - to maintain ratios in line with its current rating by 2018. It aims for USD30bn of disposals from 2016 following the BG acquisition, which we assume will go ahead. The Rating Watch reflects the risk the BG deal presents to the rating in the current environment, although we believe it will be positive for Shell's business profile in the long run.
Companies can do more than just cut capex and shareholder returns - in a scenario of continued low prices we would expect additional opex cuts to those incorporated in our forecasts, which factor in only cuts announced to date. As with capex, these cuts should be easier over time as contracts can be renewed at lower market prices.
Further details and results for a wider range of companies including Repsol, BP and ENI can be found in our report "EMEA Oil at USD45". The results referenced come from our internally generated forecasts based on the oil price assumptions. They are based on issuers' public disclosure and do not represent issuers' forecasts individually or in aggregate.
The figures quoted represent our initial expectations for 2016-2018 based on the prices referenced above, which are a modest stress to our current base case price deck of USD45/55/60. Our USD45 oil price deck reflects our expectation for some price recovery in the second half of this year as the market nears balance. We expect to update these forecasts shortly following release of the companies' results, which should give us more insight into how they plan to deal with the further drop in oil prices.
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