Exxon Mobil Corp. was demoted from the top credit rating by Standard & Poor’s for the first time since the Great Depression as the collapse of the biggest oil-market rally in history strangled cash flows.
The global crude explorer with sales that dwarf the economies of most nations sought to retain the AAA rating when S&P placed it on notice in February. Citing concern that credit measures would remain weak through 2018, S&P warned Exxon that it was in danger of losing the top grade first bestowed on the oil giant in 1930 and shared with just two other U.S. corporations. The rating was lowered to AA+, S&P said in a statement on 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,” Standard & Poor’s wrote in the note.
S&P questioned Exxon’s decision to spend $54 billion on stock buybacks since 2012 even as its debt load was doubling. Exxon’s preference for returning cash to shareholders may be hurting it’s ability to stockpile cash and pay down debt, the credit rating company said.
Exxon also is facing challenges in finding enough new discoveries to replace the crude it’s pumping from the ground, S&P said on Tuesday. The company only found enough new oil last year to replace 67 percent of its production.
“In our view, the company’s greatest business challenge is replacing its ongoing production,” S&P said.
The oil-market crash that began in late 2014 has choked crude-producing nations like Nigeria and Venezuela of cash, thrown hundreds of thousands of employees out of work, stalled drilling and pipeline investments around the world and even reverberated into ancillary industries such as steel-making and railroads. Exxon was one of the last holdouts against the wave of credit downgrades that engulfed oil drillers with diminishing prospects of paying debts, dividends and rig fees.
The downgrade will not only raise Exxon’s cost to borrow money but may also erode its status among oil-rich governments as a premier partner with which to do business. As Exxon Vice President of Investor Relations Jeffrey Woodbury said in February, the company’s AAA rating was a key selling point when competing for drilling licenses.