Write-Downs, while eye-catching, are not the largest issue facing oil and gas (O&G) supermajors; but they are part of the bigger, structural issues oil giants face, said S&P Global Ratings in a report.
Indeed, write-downs aside, the two biggest challenges facing the oil sector and supermajors are its volatility and cyclicality, which is not a new issue but one that the Covid-19 pandemic is testing to the maximum, and how to respond to the existential and structural questions posed by climate change and the energy transition.
Albeit, write-downs and production cuts have been headline news for oil and gas supermajors since the pandemic hit the sector.
These can look quite scary at first glance, and they can be significant, especially when they involve large-scale reductions.
However, in a report released today, S&P Global Ratings said it believes they often aren't enough to cause rating actions on their own, depending what caused them.
“In fact, we view these write-downs as part of the bigger, structural issues supermajors face. These are a short-term symptom of long-term issues—specifically lower prices.”
This is not to dismiss supermajors' strengths. "In fact, given the high ratings we have on these companies, even with modest deterioration, bond investors are likely to continue benefiting from the supermajors' solid balance sheets, substantial operating cash flows, and contribution to the global energy mix for many years," said S&P Global Ratings credit analyst Simon Redmond in the report, entitled, "Write-Downs, While Eye-Catching, Are Not The Largest Issue Facing Oil And Gas Supermajors."
"But even as these companies work to reinforce financial resilience through lower cash outflows and lower leverage, we are increasingly focused on the industry's evolution and visibility of its ongoing cash generation compared with that of other sectors," Redmond added.
Issues such as reserve lives, strategy, and their links to environmental, social, and governance factors are major parts of our analysis, because S&P recognises the long-term implications from these will be very significant in the sector.-- Tradearabia News Service