Moody’s sees “emerging threat” to oil & gas companies from climate regulation as it revises Exxon outlook

Ratings agency Moody’s Investor Services has changed ExxonMobil’s credit outlook to negative from stable – in part due to the “emerging threat” to fossil fuel companies from climate change regulation and tax, with the oil major also exposed to “rising” litigation risk linked to climate change and related disclosures.

The ratings action focused on negative free cash flow and rising debt levels at the oil major.

“ExxonMobil’s negative outlook reflects the company’s substantial negative free cash flow and expected reliance on debt to fund its large growth capital spending program,” said Pete Speer, Moody’s Senior Vice President. “We forecast debt to rise, despite some potential mitigation from asset sales, causing ExxonMobil’s credit metrics to weaken for the next few years.”

But Moody’s also warned that 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 or conservation”.

The agency – which has recently acquired stakes in Chinese ESG data provider SynTao Green Finance, research house Vigeo Eiris and US-based climate risk specialist Four Twenty – said: “Environmental considerations incorporated into our credit analysis for ExxonMobil are primarily related to potential carbon dioxide regulations, but also include natural and man-made hazards. Social risks are primarily related to demographic and societal trends and responsible production.

“These risks could influence regional moves towards less carbon-intensive sources of energy, which could reduce demand for oil, gas and refined products. ExxonMobil is exposed to rising litigation risk, which is an event risk related to climate change and related disclosures. Future laws and regulations that could accelerate the pace of energy transition or changes in technology that affect demand for hydrocarbons represent a material and growing risk for the company.

“These risks also add to corporate governance considerations with respect to financial strategy and risk management.

“A strong financial position and low financial leverage are important characteristics for managing these environmental and social risks.”

The negative outlook incorporates Moody’s expectation for weakening credit metrics that could result in a downgrade in 2020, it said.

"ExxonMobil is exposed to rising litigation risk"

In May this year more than 40% of Exxon shareholders backed a proposal to split the company’s chair/CEO; it was a protest vote as a resolution on greenhouse gas targets wasn’t able to go to the vote after the company appealed to the Securities and Exchange Commission.

That resolution had been lead-filed by the Church of England and New York State Common Retirement Fund – who the company said were “misrepresenting” its position on climate change. It led to what the Church’s Edward Mason termed ‘open conflict’.

In a blog post on its website, Neil Hansen, Vice President of Investor Relations and Corporate Secretary, said Exxon is “committed to doing its part to address the dual challenge of meeting the world’s growing demand for energy while reducing the risks of climate change”.

The company opened this article to comments, which are still on the site today. Here is a selection of them:

“Climate change is simply a means to implement socialism, and anyone with half a brain knows it.”

“Environmentalist leave disaster everywhere they go and are a burdensome tax to mankind.”

“EXXON! For the Win! I want a BIG dividend!”

“Man-made climate change is a political hoax and Exxon is very well aware of it. Yet Exxon continues to waste shareholders investment on this very popular political issue. You do a great disservice to the shareholders of Exxon and humanity by appeasing environmental and political climate activists.”