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A Wave of Downgrades for Big Oil's Credit

Amid falling oil prices, Moody's hit ExxonMobil (NYSE: XOM) with a credit rating downgrade on April 2, 2020, downgrading Exxon's credit one notch from "Aaa" to "Aa1." That might not seem like much, but even a single tick down in a credit rating can add millions of dollars in debt burden to a company's balance sheet. Of the hundreds of energy companies in the industry, let's see how many are getting hit with credit ratings downgrades -- and what that might mean for their futures in an already tough market.

Credit ratings matter

Image Source: Getty Images.

Just like individuals, companies have credit ratings that are considered when it comes time to take on debt either as a bank loan, or as a bigger bond offering. The credit ratings are provided by several companies, but the largest of them are Moody's (NYSE: MCO), S&P Global (NYSE: SPGI), and privately held Fitch Ratings.

Of the dozens of different ratings given by these agencies, the theme is that any company given a rating starting with an "A" is investment grade, all the way up to the maximum AAA (or in some cases, "Aaa") rating. A company with a rating starting with a "B" from any of the agencies is potentially investment-grade but not quite there yet. If a company's credit rating starts with a "C" or below, the agency considers the company's debt garbage, or "junk."

From time to time, the companies that provide these ratings will review a company's financials to gauge whether its rating deserves a change -- or whether the existing rating still applies. When ratings change, the agency explains why.

Since Wall Street widely respects the rating agencies' opinions, investors can use these announcements as analysis into a company's overall health, rather than just its debt. And with plummeting oil prices and significant demand shocks, investors can expect a forthcoming tranche of downgrades in the energy industry.

For example, Moody's hit Occidental (NYSE: OXY) with a pretty harsh downgrade of "Ba1" on March 18, leaving its rating on the precipice of "junk" status. According to Moody's, Oxy's recent acquisition of Anadarko added too much debt and preferred stock to an already highly leveraged portfolio. In a follow-up announcement on April 23, Moody's plans to review the company's credit rating further, given the current prices of oil.

A downgraded rating has almost no short-term effect on a company. But in the long term, that company will pay much higher interest rates on any debt it tries to issue in the future. Like consumer credit ratings, the better a company's credit score, the more favorable its terms are when it asks to borrow money.

Companies not getting downgrades

Not all oil stocks suffered the same fate. Agencies stood firm on several recent ratings, citing the quality of the respective companies' oil and gas reserves, their ability to hedge price fluctuations, and their diversity in operations.

Fitch reiterated Total's (NYSE: TOT) "AA-" rating on May 11. Some agencies even supplement ratings announcements with an outlook for the company such as "positive, stable, or negative." Total was fortunate enough to get an outlook of stable from Fitch.

Chevron's (NYSE: CVX) credit rating of "Aa2" stood firm with Moody's along with it's stable outlook. However, this arrived on April 2 of this year, nearly three weeks before oil prices went negative, so the agency might revisit Chevron's score in the near future.

Shell (NYSE: RDS.A) & (NYSE: RDS.B), too, saw Fitch leave its rating unchanged on May 11, at "AA-" with a stable outlook.

Companies yet to be reviewed

Image source: Getty Images.

Several companies in the oil and gas industry still await their ratings reviewed. Companies that have operations heavily exposed to oil prices will likely see their credit ratings, or at the very least their outlooks, downgraded.

Apache (NYSE: APA) got a review notice from Moody's on April 13. Given the current climate in oil and gas as well as Apache's heavy exposure to upstream production, it'll likely see a downgrade from its current Baa3 rating.

Investors may wish to add a review of a company's credit rating activity from the three agencies when doing research for new investments, or whether to hold existing investments. Companies that sustain their credit ratings when rivals' marks suffer can often bode well for investors.

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Andy Ryle owns shares of ExxonMobil and Occidental Petroleum. The Motley Fool owns shares of and recommends Moody's. The Motley Fool has a disclosure policy.


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