U.S. credit ratings agency Moody’s Investors Service has shifted its assessment of colossal fossil ExxonMobil’s shares from “stable” to “negative”, after noticing that the company’s increased spending on oil and gas drilling wasn’t boosting its revenue or putting more money in investors’ pockets.
The move last week could lead to a formal downgrade in Exxon’s Triple-A credit rating next year, the Institute for Energy Economics and Financial Analysis (IEFFA) reports. A ratings downgrade would undermine investors’ confidence in Exxon and make it more expensive for the fossil behemoth to borrow money.
“The problems for ExxonMobil’s business model are fundamental—revenues have eroded and rebounding oil prices are proving inadequate to fund operating expenses, capital plans, and investor dividends,” write IEEFA Director of Finance Tom Sanzillo and Financial Analyst Kathy Hipple. And now, “Moody’s has red-flagged ExxonMobil’s rising capital expenditures and weak revenues. The oil giant is challenged by a low price environment (US$60/barrel) and diminished refining and chemical earnings.”
“The company’s high level of growth capital investments cannot be funded with operating cash flow and asset sales at projected levels given ExxonMobil’s dividend payout, absent meaningfully higher commodity prices and earnings from downstream and chemicals,” Moody’s analysts wrote.
“The negative outlook also reflects the emerging threat to oil and gas companies’ profitability and cash flow from growing efforts by many nations to mitigate the impacts of climate change through tax and regulatory policies that are intended to shift global demand towards other sources of energy and conservation.”
IEEFA notes that the accumulation of challenges Moody’s identifies goes beyond immediate market conditions. “The analysis situates ExxonMobil’s present financial condition against the backdrop of recent business decisions. Over the past few months, the company has acknowledged that its attempt to pick up quick cash from the Permian Basin came up short. The company now sees the investment as a long-term proposition at a time when heavy capital investments and low earnings have undermined the company’s basic value proposition to investors.”
In response, Exxon announced plans to sell off oilfields in Europe, Asia, and Africa with total value of US$25 billion, in what Reuters calls a “marked acceleration of the U.S. oil major’s previous divestment plans. It would represent an ambitious attempt by Chief Executive Darren Woods to catch up with competitors who carried out sweeping portfolio reviews and sold swathes of assets following the 2014 market crash.”
The sales “would free up cash to invest in new developments in Guyana, Mozambique, Papua New Guinea, Brazil, and the United States,” the news agency adds.