Issuance of Large Debts By Major Oil Companies; Why? – Exxon Mobil Corporation (NYSE:XOM) in Focus


A report was published by the Financial Times which delineated various debts issued by significant energy companies in this year. It ought to be noted here that the amount of issued debts is quite large. The prices of crude oil have been going downhill across the globe, and owing to this reason as a consequence the profit margins have also decreased. In such a situation, maintenance of cash is a serious issue for oil companies. To cope up with this challenge, issuance of debt appears to be the best option.

This same report of Financial Times incorporates a quote of Morgan Stanley. Stanley asserts that the statistics of debt issued in the first quarter of fiscal year 2015 by important oil companies, of both United States and Europe, has escalated a great deal. To be precise, the increase in this issued debt amounts to approximately 60%. This increase is in comparison to the debt that was issued in the last quarter of the year 2014. Rather, the figures of this year also break the record that had been set six years ago about issued debt.

In these circumstances, smaller companies are the ones which have to face a bigger challenge. The survival of such companies is in jeopardy; while larger companies on the other hand can survive anyhow. Their size, market shares and dominance makes this possible. Borrowing prices continue to move up the scale for smaller companies in the market. As a consequence, many such companies have resorted to the last option i.e. they have put themselves up for sale.

Other bigger companies such as Exxon Mobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) have started issuing greater amounts of debt in this context to purchase these smaller companies that have put themselves up to sale. Bonds amounting to approximately $31 billion  were issued in merely two months i.e. January and February of fiscal year 2015 by Exxon, Chevron, BP plc (ADR) (NYSE:BP), and Total SA (ADR) (NYSE:TOT). The total amount of debt issued by all oil and gas companies across the world was $63 billion which means that this $31 billion is almost half of the total debt.

There are also speculations and a very likely possibility that these oil companies would now be heading for acquisitions. Martjin Rats, a US bank analyst, said in this context, that the present conditions have rendered smaller companies very vulnerable and ideal targets for acquisition.

Furthermore, maintenance of dividends is another significant factor in order to ensure survival in a situation where the crude oil prices are tumbling down. Thus the cheaper solution to get through this mess is to fund greater projects and make sure that debt issuance takes care of dividends.

In accordance with this strategy, nearly all oil companies are striving for the maintenance of appropriate dividends. However, in contrast to this popular strategy, Eni Spa (ADR) (NYSE:E) has chosen to go for a completely different mode of action. It stands as an exception in the market, since it has decided to cut down its dividends instead of maintaining them.

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