Oil and gas juggernaut ExxonMobil (NYSE:XOM) is a relative stranger to the debt market. The biggest energy company in the world hasn't sold bonds in more than 20 years. That streak just ended, on news that ExxonMobil sold $5.5 billion in debt, which represents its biggest bond offering on record.
While it's reasonable to be concerned about a company taking on billions in new debt, it makes perfect sense for ExxonMobil to access the capital markets right now. Debt is cheap, thanks to interest rates that are still near historic lows. And, as the Federal Reserve increases the pace of its stimulus reduction, rates may soon rise. As a result, the window of opportunity for ExxonMobil to access extremely cheap debt to finance its strategic initiatives is closing.
Sluggish performance last year warrants investment
By now, it's no secret that integrated oil and gas majors like ExxonMobil and Chevron (NYSE:CVX) performed fairly poorly across the business model. On the upstream side, field declines and under-performing oil and gas production kept profits contained. Consider that ExxonMobil posted a 1.5% decline in production, which contributed to its upstream profits dropping 10% last year. Similarly, Chevron's upstream earnings fell 12.5% last year, which management attributed to lower global crude oil prices.
ExxonMobil's downstream segment fared even worse. Shrinking margins on refined product sales and the absence of a one-time gain in the comparison period resulted in ExxonMobil's downstream earnings collapsing by three-quarters in 2013 versus 2012. Chevron fared slightly better than its major rival in downstream performance last year, but still, its earnings in that business fell by nearly half.
As a result, it's a good a time as any for ExxonMobil to raise cash to further its operational strategy. ExxonMobil could use the cash raised to pursue an acquisition of a company or assets, or to pay off higher-cost debt.
ExxonMobil's fortress balance sheet not in danger
It's understandable for investors to worry about a company taking on $5.5 billion in new debt. However, ExxonMobil has more than enough financial strength to handle it ExxonMobil is one of only a select few companies to hold the coveted triple-A credit rating from Standard and Poor's. The company generates strong free cash flow, and has more than enough cash on the books to keep its balance sheet strong.
According to ExxonMobil's 2013 10-K filed with the SEC, ExxonMobil held just $6.8 billion in long-term debt at the end of last year. For a company that has generated an average of more than $37 billion in earnings every year since 2010, it's clear that its debt load is entirely manageable.
Making the debt sale even more attractive is the fact that it's at an extremely low cost to the company. Of the $5.5 billion issuance, ExxonMobil sold $1 billion of 10-year debt at a 3.1% coupon. This stands just about 50 basis points above similarly dated U.S. Treasury Bonds.
In addition, the company sold $1.75 billion of five-year notes at 1.8% and $1.5 billion worth of three-year notes that yield less than 1%. These yields are significantly below ExxonMobil's current dividend yield, which stands at about 2.7% at its recent stock price.
Now's a great time to access the bond market
For a corporate juggernaut like ExxonMobil that generates tens of billions in profits each and every year with little long-term debt on the books, it makes complete sense to sell $5.5 billion in bonds. Interest rates are still very low, but that may not last long if the economy improves and the Federal Reserve continues to taper off its stimulus programs.
Plus, ExxonMobil has a sterling credit quality, meaning it's able to sell bonds at yields only modestly higher than the current yields on comparable U.S. Treasuries. ExxonMobil can use the proceeds from its low-cost debt sale to acquire new resources and assets, to help get production and earnings going in the right direction again this year. That's why the bond sale represents a shrewd financial decision on the part of ExxonMobil's management.
1 thing is for sure, and that's that Exxon's dividend can hang with these
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Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.