Exxon Mobil Corp. has been downgraded from the top credit rating it had for the last 67 years on Tuesday, leaving just two AAA-rated companies in the U.S. Standard & Poor’s stripped the biggest American oil exporter of its perfect AAA rating, citing the fall of crude oil prices, low energy prices and the energy giant’s massive amounts of debt.
Exxon Mobil has had an AAA rating since 1930, even during the Great Depression. It was widely seen as the last stronghold against an industry-wide sweep of downgrades. Now, S&P gives Exxon an AA+ measure of credit-worthiness, which indicates a very strong but waning capacity to meet its financial commitments. S&P also pointed out Exxon’s spending commitments, including expensive drilling projects and fat dividend payments.
“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,” S&P wrote in the note.
AA+ is the same credit rating as the U.S. government, which S&P famously downgraded in 2011 in the midst of an economic crisis. The prestigious AAA or “perfect” ratings are reserved for entities with an extremely strong capacity to pay off their debts, allowing them to borrow money very cheaply.
— Reuters Business (@ReutersBiz) April 26, 2016
This can only be seen as a defeat for Exxon, who saw its long-held AAA rating as a source of pride and fought to maintain its credit rating even after S&P put the multinational energy behemoth on notice in February, according to Bloomberg. Now, only two companies in the United States maintain the coveted platinum-plated AAA rating: Microsoft Corp. and Johnson & Johnson.
“Nothing has changed in terms of the company’s financial philosophy or prudent management of its balance sheet,” Scott Silvestri, a company spokesman, said in an e-mail quoted by a separate Bloomberg report. “Exxon Mobil 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.”
Exxon’s downgrade is an ominous sign of the financial stress the entire oil industry is under due to low crude oil prices and the global production glut; it’s a sign that even the mightiest multinationals are not immune. Since oil prices fell by about 60 percent since June 2014, oil companies face cash flow slowed down to a trickle, which causes them to cut needed spending and take on more debt.
Exxon itself reported a profit of $16.2 billion for last year, a 64 percent drop from the year before. Its long-term debt has also doubled to a whopping $20 billion. Compare that to the near-record annual profit of $44.9 billion it boasted in 2012. CNN Money reported that S&P believes Exxon should spend money to make money.
“S&P believes Exxon will eventually have to ramp up spending in order to maintain production and replace depleting oil reserves. S&P said Exxon is likely to return cash to shareholders through dividends and share buybacks, instead of paying down debt. S&P warned it could downgrade Exxon further if the company doesn’t cut costs enough or adds more debt to pay for acquisitions or dividends.”
— Bloomberg (@business) April 26, 2016
This credit downgrade comes at a time when oil is $44 a barrel, the economies of oil-exporting nations are hurting for cash, hundreds of thousands of employees are being laid off, and drilling and pipeline investments have come to a virtual standstill. Other oil companies, such as Chevron, EOG Resources, Devon Energy, Apache, Hess and Marathon Oil have also experienced downgrades in recent months. Exxon was one of the last companies holding out against the tide, but no more.
Still, some analysts remained optimistic about the future of Exxon’s credit.
“This really has no financial impact. Exxon should have no problem issuing debt in the future at a very low rate,” Brian Youngberg, senior energy analyst at Edward Jones who covers Exxon, told CNN.
Companies like Exxon also face the challenge of reconciling their spending cuts with the need to find new discoveries to replace their ongoing production. Exxon only found enough oil to cover 67 percent of its production last year. Even if they manage to keep their credit in order, will it be enough to slow the fall of an industry that seems to be tumbling down around them?
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