Exxon Mobil Corp.XOM and Chevron Corp.CVX were among energy companies that had their credit ratings downgraded or outlooks revised by Standard & Poor's Ratings Services ("S&P"). The outlook for Exxon Mobil and Chevron was lowered to 'negative' from 'stable', S&P said in a statement last week. At the same time, the agency cut ratings for several other oil and gas producers, including Chesapeake Energy Corp. CHK , Denbury Resources Inc. DNR and Whiting Petroleum Corp. WLL .
In particular, the 'negative' outlooks for U.S. giants Exxon Mobil and Chevron reflects the possibility of downside risk in their earnings and financial performance in the next one to two years.
Why the Downgrade?
The S&P action comes in the wake of oil's horror show that has seen black gold's price come down from some $110 per barrel in mid-2014 to less than $50 now. The commodity's collapse has threatened the industry's creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.
For Exxon Mobil and Chevron, S&P analysts noted that the two largest U.S. energy companies by market value have got more debt in their books than in 2009 - the last time commodities saw a cyclical decline in prices. However, output and costs are at similar levels. Moreover, weak realizations limit the companies' internally-generated cash flow amid high capital spending and dividend payments. The ratings firm also believes that refining margins - that have saved the blushes for the supermajors over the last few quarters - have shrunk considerably and will further hamper profits.
What's more, the outlook remains grim too, with fundamentals suggesting that the odds are firmly stacked against a sustained crude rally. As per S&P, things are expected to turn around only in 2017.
Are Exxon, Chevron in Peril?
It's true that the commodity price rout has brutalized Exxon Mobil and Chevron's upstream business segment revenue and earnings. For more than a year, the two biggest U.S. energy producers have seen their stock price decline precipitously, as the commodity downturn has taken its toll on the entire industry. Since July of last year, shares of Exxon Mobil and Chevron have dived around 20% and 30%, respectively - a significant fall considering their status as 'traditionally defensive stocks.'
However, the companies are still sound financially. In fact, their financial flexibility and strong balance sheets are real assets in this highly uncertain period for the economy. Both remain in excellent financial health, with enough in cash on hand and a very manageable debt-to-capitalization ratio in the low-to-mid teens.
Exxon Mobil and Chevron are two of the best-run companies among the global oil majors, consistently producing industry-leading financial returns. To add to this, management has established quite a track record of conservative capital management and cash returns to shareholders.
Also, while updating the outlook for Exxon Mobil and Chevron, S&P has maintained their long-term corporate credit rating. For Exxon Mobil, it's still the coveted "AAA" - the highest grade available. Chevron's "AA" rating places it two notches lower.
Oil's Rally Boosting Battered Stocks
Crude prices have been climbing higher since last week, with 'The Energy Select Sector SPDR' posting a jump of 12.5%. Exxon Mobil and Chevron have gained 6% and 11% in the meantime. There are investors who see oil's brief rally as just the calm before the storm.
The Zacks Rank has also been reflective of this development, with both the supermajors improving to a Zacks Rank #3 (Hold) from the Zacks Rank #5 (Strong Sell) they were carrying a short while ago.
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