Fitch Ratings says that its 2009 credit outlook report for the European integrated oil and gas sector shows that European oil and gas companies should be able to maintain healthy credit metrics despite the agency forecasting a slowdown in global economic growth next year. Fitch believes European integrated oil and gas companies will be able to sustain robust credit metrics in the face of hurdles an economic downturn could raise, such as a reduction in demand for crude oil and greater volatility in crude oil prices than in recent years.

"Fitch expects the European integrated oil majors to maintain stable credit metrics in 2009," says Jeffrey Woodruff, Senior Director in Fitch's energy team in London. "Currently, the trend for oil prices is down, but Fitch anticipates that the European oil majors will be able to reduce operating costs or postpone capital expenditures in order to preserve capital."

Fitch expects crude oil prices to become more volatile in 2009 as OPEC and other producers struggle to strike a balance between the desire to support high oil prices and the need to support the global economy during an economic slowdown. Walking this tightrope means OPEC will have to continually address the need to increase and decrease production targets over the course of 2009, thereby possibly adding to the price volatility of a currently tight oil market.

The agency expects the decline in oil demand from emerging economies to accelerate and to correlate with a general economic slowdown in developed economies as emerging market manufacturers - and ultimately emerging market exporters - reduce output and scale back demand for energy as the world economy slows.

The agency also notes that global downstream refining capacity additions of around 1.2 million barrels per day, which commenced in 2007, are expected to be largely completed by 2009. European refining margins are consequently expected to come under pressure throughout 2009 due to this increased capacity coming online in conjunction with the economic slowdown weighing down oil product prices.

Additionally, merger and acquisition activity in the industry is expected to increase globally due to oil price declines negatively impacting smaller, more highly leveraged operators and because major oil companies have accumulated large cash positions. Fitch, however, sees limited opportunities for European majors to participate in such activity as prime takeover targets are either located in the US (and therefore likely to be taken over by American majors), or located in emerging markets where resource nationalism is at a high point.

All the European integrated oil and gas companies rated by Fitch currently have healthy balance sheets, as evidenced by their strong credit ratios going into 2009. Companies in the sector, except for OMV AG ('A-'((A minus))/Outlook Stable'), are presently able to comfortably finance capital expenditure with cash flow from operations. Excluding BP plc ('AA+'/'F1+'/Outlook Stable) and OMV AG, all rated entities are generating positive free cash flow which could be used to reduce leverage and further support or strengthen credit profiles.