Exxon Mobil Corporation (XOM) is the largest publicly traded oil company in the world, and that gives the company certain benefits. Not only is it diversified — it’s got both upstream and downstream operations — but it enjoys a top-notch credit credit rating that only three companies in the world currently enjoy. But, that elite rating is now in jeopardy, and XOM stock could suffer as a result.
Investors shouldn’t ignore the risk this poses to the Exxon stock price going forward. Until now, XOM shares have been, relatively speaking, extremely insulated from the crash in oil prices. But, if Exxon’s credit rating gets slashed, the stock may start reacting more like its peers to any incremental decline in energy prices.
XOM Stock Has Been Insulated
In June 2014, Brent crude oil went for $115/barrel. Today, it goes for $33 — a 71% decline. United States Oil Fund LP (USO), which aims to track the spot price of oil via futures contracts, has plunged 77% since then. The Energy Select Sector SPDR (XLE), which tracks a large group of energy stocks in the S&P, is off 42%.
Exxon’s stock price is off just 21% over that period, and is off even less when you account for its dividend, which currently sits at 3.5%.
Insulating XOM stock from a dramatic crash has, in part, been its downstream operations (refining, marketing and selling), which tend to enjoy higher margins as oil prices fall. This is a nice hedge for diversified oil giants such as XOM and Chevron Corporation (CVX).
Plus, since Exxon is extremely well-capitalized, investors aren’t worried about the company’s liquidity throughout a prolonged period of lower energy prices. But, credit rating agencies aren’t so worry-free. Earlier this month, Standard & Poor’s warned that Exxon’s elite AAA credit rating may be in jeopardy. Right now, only XOM, Microsoft Corporation (MSFT) and Johnson & Johnson (JNJ) have that rating.
Yesterday, Moody’s changed its outlook on Exxon’s Aaa rating from “stable” to “negative” as well, insinuating that a downgrade in the near future is a very real possibility. XOM has enjoyed a Aaa rating from Moody’s for over 90 years.
These elite ratings reflect a company’s default risk, and having the top rating from Moody’s and S&P basically tells lenders a default is impossible. This allows Exxon to raise money in the debt markets at extremely low interest rates. That capital can then be put to use investing in new discoveries, paying the dividend, capital expenditures, acquisitions, etc. It’s part of what separates XOM stock from the crowd and gives it a competitive advantage.
Says Moody’s:
“The negative outlook reflects our expectations of negative free cash flow and weak cash flow based leverage metrics.
“While the company is cutting its capital spending and operating costs in response to lower commodity prices, this diminished level of capital reinvestment could adversely affect Exxon Mobil’s reserve replacement and production profile in the latter part of this decade.”
In a nutshell, it turns out that a near-two-year slump in oil prices simply isn’t good for Exxon in the long run. That should be obvious, but Wall Street may finally be forced to acknowledge this fact in 2016. And that won’t be pretty for XOM stock, which could start to lose major ground in the coming year.
Remember, just because Exxon is a giant doesn’t mean it’s immune from today’s extreme market forces. CVX, which has lost 20% in the last year as the sustainability of its dividend has come into question, should be a painful reminder of that.
While Exxon clearly isn’t in any existential danger in the long-run, and is in fact probably a solid long-term buy for investors’ retirement portfolios, you’ll want to be careful before going long on XOM in the short-term.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
