ExxonMobil's Credit Rating Downgraded For First Time Since the Great Depression

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Oil industry titan ExxonMobil has had a gold star from Wall Street bankers for decades, through the Great Depression, a world war, and a string of industry booms and busts.

Until this week, anyway.

After a nearly two-year plunge in the price of crude, the bond-rating agency Standard & Poor's has cut ExxonMobil's credit score down a notch from the long-prized AAA. S&P warned the ongoing slump could dent the company's balance sheet, and other observers warn that may be just the start of a new round of trouble for the petroleum majors.

"I think it signals a bigger issue for the industry," said Muriel Moody Korol, a senior attorney at the Center for International Environmental Law. "The oil industry is volatile, as we know. But I think climate-related risk is finally, actually starting to play in here."

S&P's decision focused on rising red ink rather than mercury. ExxonMobil's debt "has more than doubled in recent years," as the company spent big on new projects when crude prices were high, the ratings agency wrote. Meanwhile, stock buybacks and dividend payments to shareholders "substantially exceeded internally generated cash flow."

ExxonMobil is the biggest US oil company and the world's largest publicly traded producer. Having a AAA rating allowed it to borrow money at dirt-cheap interest rates, and the company and its corporate ancestors had held that rating since 1930.

But the entire industry has been struggling with a worldwide glut that has driven prices down from more than $100 a barrel two years ago to as low as $26 in January. It's trading around $45 a barrel this week.

S&P's decision left ExxonMobil's bond rating at a still-formidable AA-plus, and in a written statement, the company said its books remain robust.

"ExxonMobil places a high value on its strong credit position and continues to be focused on creating long-term shareholder value despite near-term market volatility," the company said. "ExxonMobil's access to financial markets on attractive terms remains strong and is a competitive advantage relative to industry peers."

But with governments pushing to cut planet-warming carbon emissions and rein in climate change, oil companies are going to be under pressure even when prices recover, said Jim Krane, an oil analyst at the Baker Institute, at Houston's Rice University.

"If the world starts to get serious about climate change, we should expect to see policies that target fossil fuel demand," Krane said. Governments are eying taxes on carbon or requiring improvements in fuel efficiency, as the United States has mandated, while private companies, governments, and nonprofits are boosting alternatives to fossil fuels.

"In the old days, people stopped looking for oil substitutes as soon as oil prices dropped," he said. "Things are different now."

Korol's organization released documents earlier this month that outlined the oil industry's early research into climate change, which linked carbon emissions from fossil fuels to a warming climate as early as the 1950s. Prosecutors in several states are probing whether ExxonMobil misled shareholders about the risks posed by climate change, downplaying the threat for decades after conducting groundbreaking research in the 1970s. And Korol warned in a 2015 report that bond-rating agencies like S&P were underestimating the risks that efforts to control emissions pose to corporate profits.

Korol said that's left oil companies facing some of the same problems as their colleagues in the coal business, where shrinking demand has driven three of the top five US mining companies into bankruptcy.

"I think Exxon being downgraded from its marquee status of AAA is a signal that we could be facing structural decline for oil and gas companies as well," she said.

Not so fast, Krane said. Oil has one advantage that coal doesn't: Utilities can switch from coal to natural gas or other, cleaner fuels to run their power plants, but oil is mostly burned in ships, cars, and planes — and alternatives haven't cut as sharply into that market, Krane said.

"I haven't heard anybody put oil into the same boat as coal companies," Krane said. But he added, "All fossil fuels are coming under withering scrutiny, and oil is not exempt."

That could leave big producers like ExxonMobil or national oil companies, like Saudi Arabia's Aramco, facing the risk of having big reserves of crude they can't sell. The Saudis have warned several times that their industry — the lifeblood of the kingdom's economy—faces threats from climate policy and the prospect that global demand could level off or shrink, Krane said.

Korol suggested that fear may be driving the current glut. The Saudis, who were the world's largest oil producer until the US shale boom revitalized the American industry, refuse to rein in production and stabilize prices, possibly because they want to sell their oil as fast as possible, she said.

"They want to use up their reserves before we're at a point where we tell them you can't use their fossil fuel reserves," she said. "And if they're the biggest player in the market, if they're saying, 'We're going to try to get rid of our reserves, and screw the rest of you,' I think it's a bigger problem for the industry."

Follow Matt Smith on Twitter: @mattsmithatl

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