Just how damaging have low oil prices been for commodity-dependent companies? For the first time since the Great Depression, Exxon Mobil has a less-than perfect credit rating.
Standards & Poors Ratings Services (S&P) announced Tuesday that after a review of Exxon's operations, it is cutting the oil-producer's credit rating from a perfect AAA to AA+. This downgrade marks the first time since 1930 that Exxon has had anything less than a AAA rating.
The ratings agency attributed the cut to a variety of factors, including the low price of oil and high dividend payments. (In 2015, Exxon paid a total of $2.88 per share in quarterly dividends; in February, the company announced a 73-cent per-share first quarter dividend, an amount that is consistent quarter-over-quarter but up four cents per share year-over-year.)
"We believe Exxon Mobil'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," S&P said Tuesday. "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 agency acknowledged that Exxon has improved efficiencies, but went on to say that maintaining production and replacing reserves will require high spending, which in turn will put Exxon's leverage at weaker levels than an AAA rating would allow.
S&P also said it believes that Exxon could continue to return to cash to shareholders rather than reducing debt or building up cash reserves, which could limit "improvement in our projected credit measures when commodity prices improve."
The good news for Exxon is that S&P's outlook for its future is stable; the ratings agency said that it expects Exxon's debt-to-EBITDA ratio to remain below 1.5x.
"The company's very long history of making large investments and acquisitions in a fiscally prudent manner is a positive rating factor for its credit quality," S&P added.
Worth noting is the fact that this credit rating downgrade comes amid a time when oil prices have moved well off their earlier lows: according to Citibank analyst Christopher Main, the rolling Brent spot price has risen more than 60% since its January trough -- despite crude inventories building during the entire time. As of midday Tuesday, WTI crude futures were up 3.2% at $44.01 a barrel, while Brent crude futures were up 3.04% at $45.83 a barrel.
Meanwhile, Exxon shares have remained largely unaffected by the historic loss of its perfect credit rating. The stock briefly dipped into negative territory in the time surrounding S&P's announcement but have since rebounded; shares are currently up 0.64%.
