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Rakesh Upadhyay

Rakesh Upadhyay

Rakesh Upadhyay is a writer for US-based Divergente LLC consulting firm.

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Should Exxon Mobil Shareholders Be Worried About a Ratings Cut?

One might think that a ratings cut would hurt a supermajor, but when Standard & Poor's Ratings Services recently downgraded Exxon Mobil’s AAA rating to AA+, the market responded by pushing the price of its stock up by 0.3 percent, indicating that traders don’t view the news as negative enough to impact the company’s fundamentals.

Still, this is turning out to be the worst energy crisis in decades and it’s finally affecting the most stable of the oil companies. Significantly, it is the first time since 1949 that Exxon Mobil has lost its AAA rating. So even if the market reaction was muted, it’s a harbinger of bad times to come.

"It shows you low oil prices humble even the mighty," said Fadel Gheit, a senior oil analyst at Oppenheimer. "They are off the gold standard."

With Exxon losing its top rating, only Johnson & Johnson and Microsoft Corp are left with AAA ratings in the U.S. Even the U.S. government’s sovereign credit is not rated AAA, after its downgrade in 2011.

Consider this, though. Even with the downgrade, Exxon Mobil has the highest rating among its supermajor oil peers. So even though the company’s fundamentals are affected in this low price crude environment, it still remains one of the strongest energy giants in the United States. Related: Venezuela’s Electricity Blackout Could Cut Off Oil Production

There is still plenty of money bouncing around.

The ratings cut will increase Exxon’s cost of borrowing, but the added burden will be minimal. In the world of zero and negative interest rates, fundamentally strong firms have easy access to credit at reasonable rates.

“With rates this low, we’re really not talking about any kind of significant aspect to their cash flow,” said Jack Flaherty, investment director at GAM. “Rates are so low overall they can fund at attractive rates,” reports The Wall Street Journal.

According to Bank of America Merrill Lynch index data, the spread to own triple-A bonds over the Treasury’s quoted at 0.67 percent, whereas, the spread was 0.84 percent for AA bonds.

At the end of the day, ratings matter—but not that much. Related: How The Debacle At Doha Marked The End Of An Era

As the companies are able to avail credit at low rates, the management at times adopts certain measures for the benefit of the company and its shareholders, which are deemed risky by the rating agencies. The companies are ready to sacrifice their rating while working towards their long-term goal.

“My impression is that the value of having that triple-A rating has come down over time,” said Oleg Melentyev, a credit strategist at Deutsche Bank, reports The Wall Street Journal.

All the while, of course, investors are happy to earn dividends and in this they are very happy with Exxon. Related: Massive Oil Theft By Pirates Costs Nigeria $1.5 Billion Every Month

Exxon has increased its dividend over the past 33 years at an annual average rate of 6.4 percent. In the short-term, the investors won’t mind a ratings downgrade, as long as their dividends remain intact. However, if the company neglects its financial health in favour of dividend disbursement, it’s a sign of short-sightedness by the management.

Though Exxon’s profits have halved since 2013 and its debt has increased threefold, its leverage remains in the comfort zone.

The S&P report states: “The stable outlook reflects our expectation that Exxon Mobil Corp. will continue to follow moderate financial policies of low leverage and responsible capital stewardship. This expectation includes FFO to debt above 60 percent and debt to EBITDA below 1.5x.”

The current strength in crude supports the management’s decision to increase the dividend. If crude oil prices reversed and dropped back to the $30 per barrel, the management may eventually have to reverse course, but for now, shareholders are certainly welcoming the news regarding another dividend increase.

By Rakesh Upadhyay for Oilprice.com

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