ExxonMobil slidesfromtop credit AAA rating

Standard & Poor’s Financial Services LLC, a division of McGraw Hill Financial that publishes financial research and analysis on stocks and bond, stripped one of America’s largest companies, ExxonMobil, of the AAA rating it has held since at least 1949. S&P pointed to Exxon’s huge levels of debt and the backdrop of low energy prices, as well as the energy giant’s enormous spending commitments tied to its fat dividend payouts and expensive drilling projects.

This comes as a clear sign of the financial stress the oil industry is under right now. Cash flows have dried up due to the crash in oil prices, forcing producers to slash spending and to take on more debt.

Exxon reported an annual profit of US$16.2 billion last year, a 64% drop from the year before. However, its long-term debt has nearly doubled to US$20 billion.In a statement, Exxon said “nothing has changed” in terms of its “financial philosophy or prudent management of its balance sheet” and that it is still focused on “creating long-term shareholder value despite near-term market volatility”.

AAA ratings are reserved for entities with an “extremely strong” ability to pay off their debt. The prestigious rating allows them to borrow money very cheaply.Now, Microsoft and Johnson & Johnson are the only remaining American companies with AAA ratings.

According to Brian Youngberg, a senior energy analyst at Edward Jones who covers Exxon, the company looked at its top credit rating as a source of their pride. But Youngberg adds that the days of having more money than debt are behind the company now.

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.

Despite the downgrade, Exxon isn’t likely to face difficult borrowing or paying a lot more in interest. That’s especially true given today’s environment of super cheap interest rates and the fact Exxon still has a stronger credit rating than its peers. Youngberg says that this downgrade does not have any financial impact to the company and they should not face any problems in borrowing money with low rates in the future.

Other big US oil companies that suffered downgrades in the recent months include Chevron, Devon Energy, EOG Resources, Hess, Apache, and Marathon Oil.

Source: CNN Money