The perfect credit rating of ExxonMobil is no more as Standard and Poor’s decided to downgrade the company — who held the title of AAA for nearly 70 years — earlier today.
S&P had placed ExxonMobil on its watch list back on February 3 of this year and says that they made the decision to downgrade because “we believe ExxonMobil’s credit measures will be weak for our expectations for a ‘AAA’ rating due, in part, to low commodity prices, high reinvestment requirements, and large dividend payments,” Business Insider reported S&P as saying.
ExxonMobil hasn’t been drilling — despite the oil industry as a whole seeing a surplus in the amount of oil in circulation — and in an interview with CNBC last year, the CEO of ExxonMobil said that “you can make a modest return on $40 a barrel, but we wouldn’t do that because we feel that the resources are worth more than that.”
This is where we get into something known as “depletion.” Depletion is one of the reasons that S&P is downgrading ExxonMobil in the first place, because they’re afraid that when oil becomes more scarce in the marketplace again ExxonMobil isn’t going to have the resources — i.e. the wells — to meet the demand of the consumers, and since countries like Saudi Arabia still have plenty of oil and are hemorrhaging money because of low oil prices, they would certainly be willing to step in to meet demand.
When S&P looks at a company and gives it a rating, there are what’s known as basis points connected to that rating. A basis point comes out to 1/100 of a percent and is connected to the interest level given to a company when they apply for a loan. This may not seem like that big of a deal when you are talking about an individual that makes 35k a year, but when you’re talking about a multi-billion dollar company like ExxonMobil, that can come out to a lot of money.
There’s also something that’s known as the “prestige factor.” The prestige factor is important because when investors are looking at companies to put their money into, they’re going to go with the ones that look the best. The AAA rating is the best that you can have, so investors are more likely to go with a company that has that better rating than one that doesn’t.
Even though ExxonMobil is experiencing a downgrade to AA+, Business Insider reported that there may still be hope that the company can regain its AAA status, with S&P saying that “we could consider raising the ratings if management demonstrated commitment to financial policies consistent with our expectations for a minimal financial risk. These include using discretionary cash flow to reduce debt significantly when oil and gas prices recover from current levels, and commitment to maintaining very conservative credit measures…”
But this is pretty much the opposite of what ExxonMobil is doing, because Bloomberg reported S&P as saying that “the company’s debt level has more than doubled in recent years, reflecting high capital spending on major projects in a high commodity price environment and dividends and share repurchases that substantially exceeded internally generated cash flow.”
The move by S&P means that there are only two remaining companies in the United States with a perfect credit rating; Johnson & Johnson, and Microsoft.
Back in February 2015, Warren Buffett and Berkshire Hathaway dumped their stock in ExxonMobil, as the price per barrel continued to slide.
“Nothing has changed in terms of the company’s financial philosophy or prudent management of its balance sheet. ExxonMobil places a high value on its strong credit position and continues to be focused on creating long-term shareholder value despite near-term market volatility,” CNBC reported an ExxonMobil spokesman as saying.
“This really has no financial impact. Exxon should have no problem issuing debt in the future at a very low rate,” CNN reported Brian Youngberg, a senior energy analyst covering ExxonMobil, as saying.
ExxonMobil stocks rebounded despite seeing a minor slump from the announcement earlier today.
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