Oil Drop Causes Exxon Mobile to Lose Top Rating
In recent times, there were just three American companies that had a AAA rating. Since the downgrade of Exxon Mobile, only Johnson & Johnson and Microsoft remain on the market with an AAA credit worthiness. After being placed on notice by the S&P in February, Exxon was downgraded this week due stock buybacks and the current financial state of the company.
Stock Buybacks in 2012
In 2012, Exxon chose to buy back $54 billion in stock. Despite its debt load at the time, Exxon tried to return cash to to its shareholders instead of paying on its debt. The S&P questioned the fact that the company’s debt level doubled over recent years as it spent more on projects, dividends and share repurchases.Beyond debt problems, Exxon is also having issues finding new crude oil. Last year, Exxon was only able to find new oil sources to replace 67 percent of its current production. The S&P views this as the biggest challenge facing the company. On Friday, Exxon will be releasing its first-quarter earnings, which will show investors how able to company is to withstand the current market situation.
Declining Oil Prices
One of the main problems faced by Exxon is the drop in oil prices. Since June of 2014, oil prices have declined by a jaw-dropping 60 percent to reach about $44 a barrel. Oil-producing nations like Venezuela and Nigeria have been hit hard as they have struggled to make up the lost oil dollars. Thousands of employees have lost jobs in the oil industry, pipeline investments have stalled and drilling has been halted in many parts of the world. Until recently, Exxon was one of the only oil companies to avoid a credit downgrade as oil drillers faced higher debts, rig fees and lower oil prices.
Paying Dividends Can Hurt
For years, Exxon’s history of paying billions of dollars to shareholders has made it a favorite of investors. Over the last 10 years, Exxon has repurchased $210 billion of its own stock. Shareholders enjoyed this repurchasing program because it allowed their profit per share to rise. Exxon paid $2.88 per share in 2015 for quarterly dividends. In February, Exxon announced that its first-quarter dividends would be just $0.73 per share.Due to the two-year decline in energy prices, Exxon has had problems maintaining its shareholder payouts. The company has racked up debt, abandoned some of its share buyback program and slashed investments. Bankruptcies and defaults hit the energy industry, and Exxon was forced to reorient its strategies.
The recent downgrade has made it more expensive for Exxon to gain credit. While countries previously sought to work with the company due to its credit rating, nations may be less inclined to work with the energy giant in the future.
For the first time since 1930, the S&P has downgraded Exxon from AAA to AA+. According to the S&P, this was due to oil prices and high dividend payments. While Exxon has improved efficiences, maintaining production and finding new oil sources will require higher spending. This has placed Exxon in a financial situation that is weaker than an AAA rating would allow. Despite the downgrade, the outlook for Exxon is strong. The S&P stated that Exxon’s debt-to-EBITDA ratio is lower than 1.5x.
Following the announcement by the S&P, Exxon share prices dropped briefly into negative territory. By Thursday morning, share prices were up 0.40 percent, or $0.35, for the current week to date.