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ExxonMobil saw its credit rating downgraded by Moody’s on Thursday from Aaa to Aa1, with a Negative outlook. Two weeks ago, S&P cut Exxon’s credit rating. The oil major’s struggles are growing, but they predate the pandemic and the collapse of oil prices.
It seems like years ago, but Exxon gave a bullish presentation to investors in early March as part of its annual Investor Day. In that presentation, CEO Darren Woods said that Exxon would was “leaning into this market when others have pulled back,” by which he meant that the company was spending aggressively even as oil prices remained soft.
A day later, the OPEC+ talks fell apart and oil careened downwards. The global pandemic was already beginning to ravage Western Europe and would soon spread across the United States. The dual crises exploded the logic of Exxon’s growth strategy.
A raft of spending cuts from the oil majors quickly followed. Exxon itself has said it would rethink its plans and would likely announce spending cuts, but it has waited quite a bit longer than its competitors to ax its 2020 budget.
Exxon's cash flow trajectory was “already relatively weak entering 2020, as very high growth capital investment combined with muted oil and gas prices and low [earnings in its downstream and chemicals segments] resulted in substantial negative free cash flow and rising debt in 2019,” Moody’s analysts wrote. Now, “the large drop in oil prices and continued weakness in downstream and chemicals performance leaves the company poised to incur sizable negative free cash flow funded with debt.”
The credit ratings agency does not see Exxon able to regain its higher credit rating in the medium term, according to S&P Global Platts.
Even Exxon’s campaign to sell assets has not gone as planned, as it has struggled to line up buyers. In 2019, the oil major aimed to sell off $5 billion in assets, but only succeeded in generating $3.7 billion in sales. This is no small detail since Exxon has routinely used asset sales to paper over its cash flow gap, a necessary source of cash in order to finance its dividend, according to the Institute for Energy Economics and Financial Analysis (IEEFA).
“Over the past decade, the company has covered one-third of its total cash distributions to shareholders through sources other than free cash flow,” IEEFA wrote in an analysis of Exxon’s situation. “Asset sales have provided key cash infusions to make up that shortfall.”
For instance, in 2019, Exxon paid $15.3 billion to shareholders in the form of buybacks and dividends, but only generated $5.4 billion in free cash flow. The remaining $9.9 billion had to be made up somehow, and Exxon did that through selling assets and taking on debt.
But the climate for selling oil assets has deteriorated, to say the least. Lining up buyers will be challenging, and the price of the assets Exxon is trying to get rid of will be notably lower than the company had hoped.
Lower-than-expected cash flow from asset sales might mean that Exxon needs to take on more debt, especially since it steadfastly refuses to touch its dividend. The dividend yield recently topped 10 percent and is widely seen as unsustainable.
However, more borrowing only piles on more debt, which would put additional pressure on its credit rating. In mid-March alone, Exxon borrowed another $8.5 billion.
Moody’s said that even if Exxon were to somehow keep pace with its planned asset sales, the company would still take on more debt through 2021.
Ultimately, however, Exxon feels it can weather this storm, and it can certainly outlast its weaker shale competitors. The Trump administration hosted several oil executives at the White House on Friday. The oil industry is looking for a handout, and various ideas – tariffs on imported oil, filling up the SPR, loans, deregulation, and a global production cut deal – are on the table, even if they will prove to be inadequate at dealing with the market surplus.
Exxon has pushed back against too much government help or intervention, betting that a lot of shale companies will go out of business.
Indeed, according to Rystad Energy, a record number of companies will file for bankruptcy this year. The firm says that more than 70 companies could go under in 2020. And if $30 oil persists into next year, the number of Chapter 11 filings could balloon to between 150 to 200 companies.
“In our view we will need WTI prices of $40 to $45 per barrel to eliminate the upcoming explosion in the number of financially distressed US E&Ps, while the most efficient and least leveraged players will still be able to survive with oil prices below $20 per barrel WTI,“ Rystad Energy’s Head of Shale Research Artem Abramov said in a statement.
ExxonMobil won’t be one of those companies, but that does not mean that it isn’t feeling intense financial pressure. Exxon’s share price has fallen by half in the past year and is down by a third since February.
By Nick Cunningham of Oilprice.com
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