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Rating Action:

Moody's downgrades Royal Dutch Shell to Aa2; negative outlook

08 Apr 2016

NOTE: On April 15, 2016, the press release was corrected as follows: In the debt list, under outlook actions, removed outlook action for BG Energy Finance Inc. Released follows.

London, 08 April 2016 -- Moody's Investors Service (Moody's) has today downgraded Royal Dutch Shell plc's (Shell) issuer rating and the ratings of its guaranteed subsidiary debt to Aa2/(P)Aa2 from Aa1/(P)Aa1 and affirmed the company's Prime-1 commercial paper rating, concluding a review announced on January 22, 2016. The rating outlook is negative. Moody's also downgraded the issuer ratings of Shell Finance (Netherlands) B.V. to Aa2 from Aa1, Shell Oil Company (SOC) to Aa3 from Aa2, and Shell Energy North America (US), L.P. (SENA) to A3 from A2, all with negative rating outlooks.

The rating agency also withdrew the A2 issuer rating of BG Energy Holdings Ltd (BG) and the A2 guaranteed long-term debt and Prime-1 commercial paper ratings of its subsidiary, BG Energy Capital Plc.

"The ratings downgrades and negative outlook reflect Shell's elevated leverage following the BG acquisition. We view BG as a strong contributor to Shell's longer term business positioning, but under a low oil price scenario we expect Shell to generate negative free cash flow at least through 2017. Low oil and gas prices will compound Shell's challenges in delivering substantial asset sales to help reduce debt and in integrating and restructuring the upstream portfolio," said Tom Coleman, Moody's Senior Vice President.

List of Affected Ratings

Downgrades:

..Issuer: Royal Dutch Shell Plc

.... Issuer Rating, Downgraded to Aa2 from Aa1, review for downgrade

....Senior Unsecured Medium-Term Note Program, Downgraded to (P)Aa2 from (P)Aa1, review for downgrade

..Issuer: Shell Energy North America (US), L.P.

.... Issuer Rating, Downgraded to A3 from A2, review for downgrade

..Issuer: Shell Finance (Netherlands) B.V.

.... Issuer Rating, Downgraded to Aa2 from Aa1, review for downgrade

..Issuer: Shell International Finance B.V.

....Backed Senior Unsecured Medium-Term Note Program, Downgraded to (P)Aa2 from (P)Aa1, review for downgrade

....Backed Senior Unsecured Regular Bond/Debenture, Downgraded to Aa2 from Aa1, review for downgrade

..Issuer: Shell Oil Company

.... Issuer Rating, Downgraded to Aa3 from Aa2, review for downgrade

....Backed Revenue Bonds supported by Shell Oil Company, Downgraded to Aa3 from Aa2, review for downgrade

Affirmations:

..Issuer: Royal Dutch Shell Plc

....Senior Unsecured Commercial Paper, Affirmed P-1

..Issuer: Shell International Finance B.V.

....Backed Senior Unsecured Commercial Paper, Affirmed P-1

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

..Issuer: Shell Oil Company

.... Backed Revenue Bonds supported by Shell Oil Company, Affirmed VMIG 1

Withdrawals:

..Issuer: BG Energy Holdings Ltd

.... Issuer Rating, Withdrawn , previously rated A2, review for upgrade

.... Short-Term Rating, Withdrawn , previously rated P-1,

..Issuer: BG Energy Capital Plc

....Backed Subordinate Regular Bond/Debenture, Withdrawn , previously rated Baa1, review for upgrade

....Backed Senior Unsecured Commercial Paper, Withdrawn , previously rated P-1

....Backed Senior Unsecured Medium-Term Note Program, Withdrawn , previously rated (P)A2, review for upgrade

....Backed Senior Unsecured Medium-Term Note Program, Withdrawn , previously rated (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Withdrawn , previously rated A2, review for upgrade

..Issuer: BG Energy Finance Inc

....Backed Senior Unsecured Commercial Paper, Withdrawn , previously rated P-1

Outlook Actions:

..Issuer: Royal Dutch Shell Plc

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Shell Energy North America (US), L.P.

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Shell Finance (Netherlands) B.V.

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Shell International Finance B.V.

....Outlook, Changed To Negative From Rating Under Review

..Issuer: Shell Oil Company

....Outlook, Changed To Negative From Rating Under Review

..Issuer: BG Energy Holdings Ltd

....Outlook, Changed To Rating Withdrawn From Rating Under Review

..Issuer: BG Energy Capital Plc

....Outlook, Changed To Rating Withdrawn From Rating Under Review

RATINGS RATIONALE

The downgrade of Shell's ratings is driven by Moody's expectations of negative free cash flow and weaker cash flow-based metrics at least through 2017. Based on our view that low oil and natural gas prices will only gradually recover through 2018, Shell's upstream earnings could generate losses in 2016 even on a substantially increased production base with BG, as operating and other costs adjust to a lower price environment.

We expect financial metrics to remain relatively weak, with post-acquisition retained cash flow/net debt in the low 30% area in 2016 compared to 55% in 2015, and net debt/EBITDA of about 1.8x in 2016, with only gradual improvement in 2017 and 2018 as oil and gas prices recover and cost reductions are realized.

Shell has highlighted debt reduction as a top priority over the next three years. Given the negative free cash flow outlook, improving leverage will depend on Shell's timely delivery of a substantial portion of its USD30 billion asset sales program. The company has indicated that asset sales are likely to be more back-loaded in 2017 and 2018, in the early stages focusing on midstream and downstream assets with valuations that are de-linked from energy prices. While sales could be slowed down by the low price environment, we believe the company will be able to deliver on substantial asset sales. Execution on this program will be key to maintaining Shell's Aa2 rating and eventually stabilizing its outlook.

Shell is continuing with aggressive cost reductions that target at least USD3 billion in savings in 2016 versus a 2015 cost base of USD41 billion, combined with projected synergies of USD3.5 billion by 2018 as it cuts BG's duplicate overhead and other operating overlaps. While costs are being taken out across the organization, the reduction in upstream operating costs, aided by sector cost deflation and the benefits of BG's lower operating cost profile, will be key to improving Shell's profitability.

The company is guiding in 2016 to capital spending of USD33 billion on a combined basis with BG, the largest level of investment among its integrated peer group. Moody's believes that Shell's actual spending could be lower in 2016. In addition, the company is in the early stages of ranking its investments with the new BG assets in the portfolio and will derive some cash flow flexibility from this capital discipline, especially if oil and gas prices persist at lower levels over the next two to three years. Shell remains firmly committed to maintaining its dividends, although we expect the continuation of the scrip program to help reduce cash outflows in a lower price environment.

We note that, given the stress of lower pricing and priority to debt reduction, Shell's Aa2 rating does not factor in share repurchases during this period.

Shell's Aa2 rating continues to reflect its strong business profile, which positions it among the top integrated oil companies in the longer term, reflecting a broader and more diversified reserves and production base following the BG acquisition, an industry-leading position in liquefied natural gas and the integrated gas value chain, and one of the largest and most profitable downstream refining, marketing and trading operations among the integrated oil companies.

Shell Finance (Netherlands) BV's Aa2 issuer rating reflects the entity's function as an issuer of guarantees on behalf of Shell group subsidiaries and affiliates, with direct parent oversight, solid capitalization in the form of equity exceeding USD7.2 billion, and full collateralization of the guarantees via a callable time deposit with Shell Petroleum N.V., the group level holding company.

Shell Oil Company's (SOC) Aa3 issuer rating continues to be based on its strategic importance as a group subsidiary holding company for virtually all of Shell's US operations, including its "Lower 48" and deepwater Gulf of Mexico oil and gas production, all of its refining and marketing activities in the US, and Shell Energy North America (US), L.P. (SENA), which is the platform for Shell's North American trading in natural gas, power and LNG.

SENA's issuer rating was downgraded to A3 from A2, reflecting the downgrade of Shell's and SOC's ratings, but the rating is also supported by SENA's continuing strategic importance and Shell's oversight of its risk management, liquidity and financial position. In addition to equity support and liquidity lines, SOC guarantees various capacity payment obligations of SENA.

The negative outlooks for all of these entities will continue to reflect Shell's rating outlook.

Moody's is withdrawing BG Energy Holdings Ltd's A2 issuer rating and the A2 senior and Baa1 subordinated long-term debt ratings and Prime-1 commercial paper rating of its guaranteed subsidiary, BG Energy Capital plc based on insufficient information. Moody's understands that Shell will not guarantee any of BG's debt obligations and will not be providing audited financial statements that would support continued rating of these obligations on a standalone basis.

Rationale for Negative Outlook

Shell's negative outlook reflects an expected gradual improvement in cash flow based metrics but also the execution risks of integration of BG's assets, and timely delivery on cost reduction benefits and substantial asset sales in 2016-2018.

What could change the rating UP/Down

An upgrade of Shell's Aa2 rating will reflect stronger cash flow from operations with retained cash flow/net debt solidly in the 40% range or higher, along with delivery of sizeable asset sales and debt reduction in 2017-2018.

A downgrade would reflect flat or weaker cash flow metrics in the 2016-2018 time frame, along with shortfalls in asset sales and a failure to reduce post-acquisition debt levels.

The principal methodology used in rating Royal Dutch Shell Plc, Shell Oil Company, Shell Finance (Netherlands) B.V., Shell International Finance B.V., BG Energy Holdings Ltd, BG Energy Capital Plc and BG Energy Finance Inc. was Global Integrated Oil & Gas Industry published in April 2014. The principal methodologies used in rating Shell Energy North America (US), L.P. were Global Integrated Oil & Gas Industry published in April 2014, and Trading Companies published in March 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Royal Dutch Shell plc ranks as one of the largest global integrated oil companies, with proved reserves as of year-end 2015 of 11.5 billion BOE and average production of 3 million BOE/day of production. In 2015 the company reported USD265 billion in revenues and an asset base of USD363 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's downgrades Royal Dutch Shell to Aa2; negative outlook

No Related Data.
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