European oil majors BP and Total could be pressured into following Shell’s recent decision to cancel scrip dividends and return to paying its dividend entirely in cash, but such a move is unlikely to negatively impact their debt ratings, Fitch Ratings said Wednesday.
Analysts at the credit rating agency said in a note both BP and Total have rating headroom if scrip dividends are ended, at least more headroom at their current rating than Shell did.
Fitch has affirmed Shell at "AA-" with a negative outlook after last week’s decision, claiming the plan will slow the firm’s deleveraging, Kallanish Energy learns.
If both companies were to completely cancel scrip dividends beginning in 2018, it would “probably take significantly more shareholder-friendly actions, such as very large share buybacks or rising dividends, as well as rising capital intensity, for the ratings of Total and BP to come under significant pressure,” Fitch said.
All three oil majors introduced scrip dividend programs when oil prices collapsed in 2014-2015, rather than cut gross dividends, which helped balance cash flows and reduce additional borrowing.
The analysts said the recent oil price recovery, along with pressure from shareholders who don’t want their shares diluted, could incentivize oil companies to increase cash distributions by cancelling scrip dividends, launching share buybacks or even raising dividends.
Shell saved roughly $11 billion of cash with the program, but reiterated its commitment to buy back at least $25 billion of shares in 2017-2020, subject to a sustained recovery in crude prices and debt reduction. Its reference oil price is $60 a barrel.
Fitch analysts, however, see Shell's decision as credit negative “as it will reduce the company's financial flexibility under our base case of oil prices returning to below $55/Bbl in 2018, and refining margins moderating.”