March 30 - Fitch Ratings has affirmed Royal Dutch Shell plc's (Shell) and Royal Dutch/Shell Group's Long-term Issuer Default Ratings (IDR) at 'AA' with Stable Outlooks, and affirmed the Short-term IDRs of both entities at 'F1+'. Fitch has also affirmed the senior unsecured debt issued by these entities, as well as by Shell's wholly-owned direct subsidiary, Shell International Finance, at 'AA'. Debt issued from this entity is fully and unconditionally guaranteed by Shell.
The Stable Outlook reflects Fitch's view that rating changes are unlikely over the next 12-18 months. The agency remains concerned about Shell's ability to increase conventional oil production, fund its North American tight-gas and heavy-oil strategy, address volume weakness in the refining and petrochemical operations, and generate sustained free cash flow (FCF). Fitch believes Shell can maintain leverage and coverage ratios commensurate with the current ratings.
Shell's financial performance is commensurate with the current rating and is strong relative to peers. Revenue growth in the 12 months to December 2011 was the fastest amongst the international oil majors at 27.7%, against 26.4% for BP plc ('A'/Stable), 18.6% for Total SA ('AA'/Stable), and 24.6% for Chevron Corporation ('AA'/Stable). This was mainly due to higher energy prices and higher sales with the start-up of three large projects in natural gas and oil sands.
Shell's strong credit profile is also supported by an array of new projects that came on stream in 2011 and are due in the next 18-24 months. Shell has stated that it intends to increase upstream production to 4 mmboed on average for 2017 or 2018. A strategic shift to more than 50% upstream natural gas production, however, would present potential challenges to the company's integrated business profile in the long term, in Fitch's opinion.
Debt repayment began in 2011, but continued FCF availability is necessary for this trend to continue. Fitch believes that Shell may still face challenges deleveraging its balance sheet back to historical averages or to levels commensurate with a higher rating under Fitch's oil and gas sector credit factors using the agency's oil price deck of USD70 to USD95 per barrel, and assuming USD130bn-USD135bn of capex along with rising dividend payouts from 2012 to 2016. This view also supports Fitch's Stable Outlook.
Shell's liquidity is adequate for its rating level. Cash on the balance sheet at end-2011 was USD11.3bn, and it has an undrawn committed credit facility of USD5.1bn, more than sufficient to cover USD6.7bn of short-term debt maturities at end-2011. Additional external sources of liquidity include two USD10bn commercial paper programmes (fully unused at end-2011), a USD25bn euro medium-term note programme (USD12.4bn unused at end-2011) that was updated in June 2011, and an unlimited US shelf registration programme that was updated in October 2011.