How Do Hedge Funds View Two Energy Stocks Whose Credit Outlook was Downgraded by S&P?

Standard & Poor’s has downgraded its outlook on Exxon Mobil Corporation (NYSE:XOM)’s credit rating, citing perceived weakness in the next two years. Similarly, Chevron Corporation (NYSE:CVX) credit rating outlook was also downgraded by the credit ratings and indexes institution. Hedge funds had a similar outlook on Exxon Mobil in the second quarter, as Insider Monkey’s data reveal.

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In an announcement on Friday night, Standard & Poor’s revealed that while Exxon Mobil Corporation (NYSE:XOM)’s long-term corporate credit rating is still the coveted “AAA” and that its short-term commercial paper ratings is unchanged at “A-1+”, its outlook on the ratings have changed from “Stable” to “Negative”. The firm downgraded its outlook because they expect Exxon Mobil’s credit measures over the next one to two years will be weak. S&P cited lower internally-generated cash flow along with substantial capital spending and dividends as the culprit. Furthermore, it said that low oil and natural gas prices are expected to exacerbate the situation. Exxon Mobil has “substantially more debt” than the last time commodity prices dipped in 2009, it added. Things are expected to improve in 2017, however, as credit measures are expected to climb to acceptable levels in the year, the ratings firm said.

In May, S&P affirmed Exxon Mobil’s “AAA” credit rating and “Stable” outlook, but downgraded the firm’s liquidity rating from “Strong” to “Adequate”. This meant that though Exxon Mobil remained with a lot of cash, S&P expected lower prices to weigh on the firm’s margins and cash reserves. The ratings firm said then that the $59.3 billion in capital spending planned for this year will likely eat into Exxon Mobil’s cash. Other factors such as current debt maturities, upcoming dividends and stock buybacks contributed to the downgrade in May.

Hedge funds were not enthusiastic about Exxon Mobil Corporation (NYSE:XOM) in the second quarter. At the end of June, hedge funds from our database owned just 1% of the company’s outstanding stock. The aggregate value of their stakes declined by 9.28% from the previous quarter to $3.64 billion, not fully accounted for by the 2.12% drop in the stock’s price. There were, however, more hedge funds with long positions on Exxon Mobil by the end of the second quarter, as 67 hedge funds from out database were long Exxon Mobil, up by four from the end of March. Donald Yacktman’s Yacktman Asset Management owned just over 6 million Exxon Mobil shares at the end of the second quarter, down 14% from the first quarter but still the largest stake among the funds we track.

Meanwhile, Chevron Corporation (NYSE:CVX)’s long-term corporate credit rating and short-term commercial paper ratings were also affirmed by S&P at “AA” and “A-1+,” respectively. However, like its fellow energy behemoth, its outlook was downgraded to “Negative” from “Stable”. According to the ratings firm, the downgrade reflects their expectation that Chevron’s credit measures will be weak in the ratings next year because of lower oil and gas prices and refining margins. It said that Chevron is expected to outspend internally generated cash flow while it has more debt than the last time oil prices and margins were trending lower.

Hedge funds that we track were not fond of Chevron Corporation (NYSE:CVX) in the second quarter either, ending the period with just 1.20% of all of the firm’s shares. The value of stakes of 50 hedge funds in our database, which were long Chevron at the end of June, totaled $2.11 billion. However, it should be noted that the trend may be improving for Chevron as there were 47 hedge funds long the company in the previous quarter, and the value of their stakes was 40% lower than in the second quarter. This increase in the value of hedge fund holdings is despite the firm’s stock slipping over 8% in the April-to-June quarter. D.E. Shaw & Co., L.P., managed by David E. Shaw, owned 3.96 million shares of Chevron at the end of June, after having boosted its stake during the quarter.

Disclosure: None