S&P Global Ratings put the biggest oil companies, including Exxon Mobil Corp. and Royal Dutch Shell Plc, on negative watch, citing “greater industry risks” associated with climate change.
Warning comes after Biden takes office with climate change agenda
S&P Global Ratings put the biggest oil companies, including Exxon Mobil Corp. and Royal Dutch Shell Plc, on negative watch, signalling it may cut credit ratings within weeks due to the “greater industry risks” associated with climate change.
The agency’s move is likely to exacerbate investors’ concerns about the oil industry, impacting credit markets as well as equities, where shareholders have already taken fright at potential future liabilities.
“S&P Global Ratings believes the energy transition, price volatility, and weaker profitability are increasing risks for oil and gas producers,” it said in a statement on Tuesday. To factor this
change, the rating agency said it had revised its industry-wide risk assessment for the oil and gas sector to “moderately high” from intermediate.
Beside Exxon and Shell, S&P singled out Chevron Corp., Total SE and several other major Canadian and Chinese oil companies. It cut the outlook for BP
Plc to negative.
The credit warning comes days after U.S. President Joe Biden took office with an aggressive climate change agenda. On his first day, he signed an executive order for the U.S. to rejoin the Paris climate agreement and moved to limit oil drilling on federal land.
Big Oil has been struggling to keep equity investors on board, particularly after Shell and BP cut their dividends last year, shocking shareholders that have grown used to the reliability of fat payouts.
The companies, however, have so far had little trouble with credit, despite rising borrowing levels. They have typically been able to raise cheap debt to fund their multibilliondollar projects, but that could change if credit ratings are downgraded and financing costs rise as a result.
S&P Global Ratings warned the oil sector faces “significant challenges and uncertainties engendered by the energy transition,” which in turn would put “pressure on profitability, specifically return on capital.” During its golden years in the early 2000s, Big Oil generated returns on capital employed in excess of 10 per cent.