Big Oil piles on debt

The world’s biggest oil companies are borrowing record amounts of money to cope with a slump in crude prices. Luckily, there’s rarely been a better time to go on a debt binge.

Exxon Mobil Corp., Royal Dutch Shell Plc, Chevron Corp., Total SA, BP Plc and Eni SpA have together sold the equivalent of $37 billion of bonds this year, about double the amount issued in the period before oil prices plunged, according to data compiled by Bloomberg. While this is stretching their balance sheets and even resulting in credit-rating downgrades, the lowest debt costs in a year are softening the blow.

“They’re making hay while the sun shines,” benefiting from improved investor sentiment as oil prices have recovered, said Alex Griffiths, a London-based managing director at Fitch Ratings Inc. “Treasurers are making use of good market conditions to maintain liquidity buffers.”

Even though oil has increased from the lows of January as a global surplus diminished, prices are still less than half their level two years ago. The world’s biggest companies have sought to keep investors happy through the downturn by maintaining dividend payouts and investing for the future at the same time. With profit and revenue sharply down, the only way to do that is borrow more money.

Debt Opening

Debt markets are opening up for companies worldwide as central banks in the U.S. and Europe keep benchmark borrowing rates low. Investors currently demand a return of 3.09 percent to hold dollar-denominated debt of companies with an investment-grade rating, the lowest level in a year, according to data from Bank of America Merrill Lynch. For euro securities, they seek 1.01 percent, close to the record low of 0.93 percent in March 2015, the data show.

Oil companies have further benefited from the recovery in prices. Brent crude, the global benchmark, has increased 70 percent since January, aided by supply disruptions from Canada to Nigeria and falling production in the U.S. This has seen the 20-company Stoxx Europe 600 Oil & Gas Index rebound 3.9 percent in 2016 following two years of declines.

At the same time, the premiums for credit default swaps for the biggest U.S. and European oil companies, which investors use to protect against defaults, have dropped from the highest level in at least five years.

Shell sold $1.5 billion of five-year bonds this month, which were priced to yield 1.99 percent, data compiled by Bloomberg show. A $2 billion five-year debt sold by the company about a year ago yielded 2.13 percent on the first day of trading, the data show.

BP sold $1.25 billion of 10-year notes last month with a 3.12 percent coupon, versus 3.51 percent for a similar issue in March 2015. Both bonds were sold at face value. Chevron issued $1.35 billion of five-year notes this month with a yield that was 32 basis points, or 0.32 of a percentage point, lower than a sale in November.

Shell’s net borrowing has increased to about $70 billion and its gearing — the ratio of net debt to total capital — has risen to above 26 percent from 14 percent at the end of last year. In addition to the plunge in oil prices, the $54 billion acquisition of BG Group Plc added to Shell’s debt, prompting Fitch to cut the company’s credit rating in February. BP’s gearing was 23.6 percent at the end of the last quarter compared with 21.6 percent in December.

“The majors still have strong balance sheets to raise debt at competitive rates so they can manage their capital agenda, for example, to maintain dividends and strategic capital investments,” said Jon Clark, leader for oil and gas transaction-advisory services in Europe, the Middle East and Africa at Ernst & Young LLP. “It’s also a good opportunity to refinance more expensive debt.”

Dividend Priority
Oil’s slide has forced companies to cut billions of dollars of spending, delay or cancel projects and renegotiate contracts, yet they continue to make dividends their top priority. Shell hasn’t cut its payments to investors since at least the Second World War. Exxon even increased its payout a day after losing its coveted AAA credit rating last month.

Shell, BP, Eni, Total, Exxon and Chevron will together pay out about $14 billion for the first quarter, according to data compiled by Bloomberg. Some of those companies may pay a portion of these dividends in shares rather than cash.

BP Chief Executive Officer Bob Dudley said in February he is happy to let the company’s debt rise this year to maintain dividends. Debt and gearing is “something that I might lose sleep about, but not just yet,” Shell’s Chief Financial Officer Simon Henry said on a conference call last month.

“You’ve recently seen an easing of bond market risk aversion and a higher oil price,” Fitch’s Griffiths said. “That makes it a good time for Big Oil to tap the market.”