Oil companies could be left staring down the barrel of credit downgrades if governments deliver an international agreement to tackle climate change, according to a new analysis from credit agency Standard & Poor’s (S&P) and NGO Carbon Tracker.

The study, entitled What A Carbon-Constrained Future Could Mean For Oil Companies’ Creditworthiness, ran a series of scenarios to assess how two global oil giants - BP and Shell - and three Canadian firms focused on oil sands projects - Canadian Oil Sands Ltd, Canadian Natural Resources Ltd, and Cenovus Energy - would be impacted by new climate policies designed to stabilise atmospheric concentrations of greenhouse gasses at 450ppm.

It concluded that new policies could lead to a “stress scenario” for the companies where a decline in oil prices would put “pressure on cashflows” and lead to dividends being cut or projects cancelled.

“Financial models that only rely on past performance and creditworthiness are an insufficient guide for investors,” said Michael Wilkins, head of environmental finance at Standard & Poor’s, in a statement. “By analysing the potential impact of future carbon constraints driven by global climate change policies, our study shows a deterioration in the financial risk profiles for smaller oil companies that could lead to negative outlooks and downgrades. However, the effect on the majors would be more muted.”

Significantly, the modeling noted that the three companies focused on oil sands projects have issued $13.6bn of corporate bonds, with over 50 per cent of these maturing post-2020 - a scenario that could leave the companies facing “a very different context to try and refinance any of the debt which matures in the next few years”.

“Rating or outlook changes seem unlikely in the very near term, as the scenario is not materially different from the current price deck assumptions,” admitted Simon Redmond, a director in S&P’s oil and gas team.

“However, as the price declines persist in our stress scenario of weaker oil demand, meaningful pressure could build on ratings. First the relatively focused, higher cost producers, and then also more diversified integrated players, as operating cash flows decline, weakening free cash flow and credit measures, and returns on investment become less certain and reserve replacement less robust.”

James Leaton, research director at Carbon Tracker, which has been campaigning for investors to pay greater attention to the risk of fossil fuel companies becoming over-valued and creating a “carbon bubble”, said more businesses needed to be aware of the impact tougher climate change policies would have.

“Bringing in emissions ceilings has clear implications for the future fundamentals of the sector - demand and price,” he said. “The uncertainty around the future of carbon intensive fuels needs to be translated across credit analysis of business models going forward.”

His comments were echoed by Vicki Bakhshi, Associate Director at F&C Investments. “This report clearly demonstrates the value of integrating environmental, social and governance (ESG) issues into credit analysis,” she said. “At F&C we believe that factors such as climate change and environmental regulation can impact on the performance of the companies we invest in. S&P’s report is very welcome in helping us to identify where the risks lie within the global oil sector, and ensuring that they are integrated into our investment analysis.”