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Rising climate risks prompt S&P to begin review of oil majors’ credit ratings

January 27, 2021


Big Oil suffered a fresh setback after one of the most influential rating companies warned it may cut the credit score of Exxon Mobil Corp., Royal Dutch Shell Plc and a plethora of other major energy companies due to “greater industry risk” associated with climate change.

The move by S&P Global Ratings comes as the oil and gas industry is on the ropes, unloved by equity investors and facing pressure from multiple policy makers after U.S. President Joe Biden put climate change at the center of his agenda.

“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 industrywide risk assessment for the oil and gas sector to “moderately high” from intermediate.

If oil producers’ rating is cut, their cost of capital would likely increase, as debt investors demand a higher yield for the risk, potentially putting new projects at risk. Big Oil is already struggling to deliver strong returns on its investments, but so far has benefited from debt investors willing to lend it money at low interest rates.

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.

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 multibillion-dollar projects, but that could change if credit ratings are downgraded and financing costs rise as a result.

[Javier Blas and Laura Hurst]

More: Exxon, Shell face rating cuts on greater climate risk, S&P says

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