Exxon on the brink

PNG LNG operator ExxonMobil faces its first downgrade from Standard & Poor’s in 86 years.
Exxon on the brink Exxon on the brink Exxon on the brink Exxon on the brink Exxon on the brink

S&P cut the ratings of Chevron, Apache, Devon Energy and EOG Resources, but they kept their investment grade status, as did Marathon Oil, Hess Oil and Murphy Oil despite being cut to BBB-. It should be noted that the latter three remain just one notch above "junk".

ExxonMobil, one of only three US companies with a AAA status, was put on notice for a possible downgrading, with S&P saying it would decide on the PNG LNG operator's status in 90 days.

That call will be an interesting one, given Moody's launched a fierce defence of ExxonMobil on January 20, saying its "unique, highly-rated credit status has dampened the impact on the company of the global drop in oil prices".

Moody's said it did not believe ExxonMobil's expected default frequency and bond-implied ratings declines of late implied a significant diminishment of the US company's creditworthiness.

"ExxonMobil has reaffirmed its flexibility by indicating it will defer expansion in some areas and reduce exposures to its business with the weakest profit margins, while at the same time boosting output by 2017," Moody's said.

ExxonMobil was the only integrated oil company rated AAA among a group of highly-rated peers - Chevron, Royal Dutch Shell and Total (all AA1) - and one of only three AAA-rated industrial companies.

However, that was before it posted its smallest quarterly profit in more than a decade this week, and announced its earnings practically halved last year.

Net debt also soared $10.6 billion to $35 billion as it borrowed to pay its dividend.

However, Achilles Research had "no worries" for Exxon, pointing out that the world's biggest listed company was still pulling in some serious free cash flow.

While expanding refinery margins helped offset some of the earnings decline in its upstream business, Exxon's total earnings still plummeted about 58% year on year.

"Though revenue and earnings declines have been painful for companies in the oil patch, ExxonMobil is one of the best prepared companies to withstand the oil market downturn, thanks to its large size and mountains of free cash flow the company continues to pull in," Achilles said.

"When revenues are falling off a cliff that is going to have a negative impact on free cash flow, too. ExxonMobil's free cash flow, for instance, dropped from $18 billion in 2014 to $6.5 billion in 2015.

"That said, though, ExxonMobil''s free cash flow, calculated as operating cash flow plus asset sales less investments and advances, was still solidly positive."

S&P also consigned three leading shale oil and gas producers - Continental Resources, Southwestern Energy and the privately held Hunt - to "junk" status.


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