OREANDA-NEWS. March 12, 2015. Weak oil prices have significantly reduced the rating headroom for EMEA oil and gas companies that went into the slump with stretched credit profiles, Fitch Ratings says. This is typically already reflected in Negative Outlooks for those issuers, while decisions about whether to downgrade ratings will also depend on company responses and contingency plans.

Our downgrade of Total S.A. to 'AA-' in February was in part due to weaker current prices, and the weaker environment played a major part in the downgrade and subsequent default of Afren plc (RD).

Our report investigating the effect on Western European oil companies' credit profiles with Brent oil at USD 55/bbl in 2015 shows that ENI (A+/Negative) and BG Energy (A-/Negative) were among those most affected. Both Outlooks reflect operational concerns, ENI because of weakness in its downstream and gas and power businesses, BG due to historical production delays. Weaker oil prices exacerbate these problems.

Other companies' ratings more at risk from a prolonged downturn are those of BP, where still undecided fines relating to the Macondo incident will weigh more heavily on weakened cashflows, and smaller frontier high-yield names. Ratings for the latter are likely to be stable in 2015, but a more protracted slump than we expect could jeopardise some companies' ambitious expansion-driven business plans.

We expect the financial profiles of the remaining companies to be managed by a combination of opex and capex cuts, contributions from non-oil businesses (such as refining, retail and gas exploration and production), and more disciplined shareholder remuneration and acquisition strategies. Some companies will try to shore up balance sheets with disposals, although we expect the pricing environment to be weak even for non-exploration and production assets.

Our rating approach recognises the cyclical nature of oil prices, so we would not expect wholesale downgrades in response to a price drop. In addition to using price assumptions which looked conservative when prices were over USD100/bbl, we also attempt to look through a pricing cycle, only downgrading a company if we expect its credit profile to be permanently weakened. Price developments and companies' responses and contingency plans will feature heavily in our consideration of oil and gas ratings this year.

For company-by-company summaries of our current forecasts for 2015 at USD55/bbl, and discussion of what actions we expect them to take to maintain their credit profiles, see "EMEA Oil Companies at USD55/bbl" available at www.fitchratings.com.