It is no secret that the United States has been in financial struggle throughout many industries in recent years and that the oil industry is in a steep decline. Over the past 35 years, many American companies have experienced a substantial decline in their credit ratings as rated by S&P (Standard & Poor’s).
Exxon Mobil was one of the three remaining American companies that held the prestigious AAA rating. Microsoft and Johnson and Johnson are also the two other remaining companies.
This shocking news came on the 26th of April, 2016 after S&P made the decision to lower Exxon Mobil’s rating two spots from AAA to AA+. Now only two companies remain that have been bestowed the top credit score of AAA.
S&P, The Name Behind The Decision
S&P is a financial services company, which serves as one of three major credit rating companies in the United States. They are known for their in-depth financial research and publications. Standard & Poor’s has been recognized nationally through the declaration of the U.S. Securities and Exchange Commission.
Exxon Mobil, one of three companies that still hailed with the AAA rating, was given prophetic notice in February that their credit rating was in jeopardy. Standard and Poor’s, attributed Exon Mobil’s weak credit measures to various factors including low commodity prices, high reinvestment requirements, and large dividend payments.
The downgrade knocks Exxon Mobil down from a rating it previously held since 1930, with S&P stating the reasons for the decision included:
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- Decline in the price of oil due to oil market crash
- Inability to pay debt
- Poor earnings
- Costly investments
Standard & Poor’s reported that Exxon’s debt load had doubled over the past few years due to spending on large projects and cash payouts to shareholders.
The Rating Decrease Comes On The Heels Of Other Changes For Exxon
The two-tier downgrade comes at a poor time for Rex Tillerson, who is the President, Chairman, and CEO of Exxon Mobil, as he turns the corner on the age at which Exxon pushes mandatory retirement.
After spending the past ten years leading Exxon, their declining credit and rating decrease will undoubtedly color his legacy. Tillerson first started his career with Exxon in 1975 working as a production engineer, before working his way to the top. Perhaps in the face of this downturn, this is the optimal time for Tillerson to retire.
The Decline Of Oil
The declining price of oil has also been a major contributor to Exxon’s current economic status. Oil prices had not witnessed such a drastic decline since 1986 when the oil industry experienced a crash similar to the one we see today.
Presently, it is a bleak time for the oil industry with a 60% decline in price since 2014, this coupled with a decrease in demand for oil has lead to major oil companies reporting poor quarterly results. In recent years, many companies have been forced to make cuts to production, to stave off an economic crisis.
The boom in the oil industry lead oil prices to peak at USD $145 per barrel, yet in the year 2016, we have seen lows of under USD $30 per barrel with some experts believing the number to be as low as USD $18. Nearly 175 out of over 500 oil companies are at risk of bankruptcy.
Exxon Mobil has also faced the worst loss of revenue since 1999, with a decrease of nearly USD $20 billion in net income.
The Gold-Plated Companies
In the last 35 years we have witnessed the number of AAA rated, gold-plated companies dip from 60 to just 2. Johnson and Johnson, producer of consumer goods, and Microsoft, the software and technology company, now remain the only two American non-financial companies still holding the impressive AAA rating. It is only given to those companies that have the guaranteed ability to meet any obligations and that are highly financially secure.
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Since 2008 even giant companies such as Pfizer, the major pharmaceutical company, and General Electric, the multi-industry company, have been downgraded by Standard & Poor’s.
One reason believed to be responsible for the fall in AAA rated companies is that companies are now more concerned with maintaining their capital and meeting financial demands, rather than achieving the highest credit score, according to Standard & Poor’s rating system. Many say that the reputation of some rating companies took a hit when they awarded AAA credit scores to mortgage companies which later turned out to be unsustainable.
There is hope that Exxon Mobil can pull themselves back up to the top level again, just as Kellogg was able to do in 1987 after they were downgraded in 1984.