OREANDA-NEWS. Major European oil companies will not be able to balance cash inflows and outflows in 2016 under Fitch Ratings' oil price expectations, resulting in higher net debt and a further sharp deterioration in credit metrics. This will not necessarily result in downgrades as we rate "through the cycle", but the companies' ability to achieve break-even cash flow and to begin to strengthen their credit metrics from 2017 will be key to supporting their ratings.

In February we revised our price deck to USD35/bbl in 2016, USD45 in 2017, USD55 in 2018 and USD65 in the long term. Our updated company forecasts at these prices suggest that the EBITDA of Shell (AA-/Negative), Total (AA-/Negative) and BP (A/Stable) will drop by a cumulative 28% yoy, on top of the 37% decline in 2015. Net debt will rise by 15% in 2016 (excluding the effect of Shell's BG acquisition), as the companies will need to cover the gap between weakening operating cash flows and disposals and still significant capex and dividends. Shell will also need to finance the cash part of its BG acquisition.

Balancing free cash flows will become easier due to gradually recovering oil prices and more pronounced cost deflation in 2017, although much will depend on the major companies' dividend policies.

In recent weeks we downgraded Shell to 'AA-'/Negative, revised the Outlook on BP to Stable from Positive, and revised Total's Outlook to Negative from Stable. These actions reflect our "through the cycle" approach to cyclical company ratings. Our updated forecasts show that BP should sit comfortably in the mid 'A' category by 2018, which is when we expect the cycle to be well on the way to normalising and is the main focus of our analysis. We therefore this morning affirmed BP's rating. Leverage at Shell and Total will be close to our negative rating action trigger. We may therefore downgrade these companies in the next 12-18 months if they are unable to reduce free cash flow deficits, resulting in leverage rising above our expectations.

One of the traits distinguishing major oil companies from smaller ones is their strong liquidity, even at the bottom of the oil cycle. Liquidity enables them to finance debt repayments, capex and dividends from available sources, such as cash, committed credit facilities, cash from operations and agreed disposals. Total and BP's liquidity will be exceptionally strong in the next two years; Shell's is weaker due to the BG acquisition, but still robust.

Our detailed financial forecasts for Shell, Total and BP under our new price deck, and liquidity snapshots, are presented in our report "Updating EMEA Integrated Oil Forecasts - Part 1". We plan to publish forecasts for other Fitch-rated EMEA integrated companies in the coming weeks.