New York Attorney General Eric Schneiderman is investigating why
Exxon Mobil Corp. hasn't written down the value of its assets, two
years into a pronounced crash in oil prices.
Mr. Schneiderman's office, which has been probing Exxon's past
knowledge of the impact of climate change and how it could affect
its future business, is also examining the company's accounting
practices, according to people familiar with the matter.
An Exxon spokesman declined to comment about the investigation
by the Democratic attorney general but said Exxon follows all rules
and regulations.
Since 2014, oil producers world-wide have been forced to
recognize that wells they plan to drill in the future are worth
$200 billion less than they once thought, according to consultancy
Rystad Energy. Because the fall in prices means billions of barrels
cannot be economically tapped, such revisions have become a staple
of oil-patch earnings, helping to push losses to record levels in
recent years.
Exxon hasn't taken any write-downs—the only major oil producer
not to do so—which has led some analysts to question its accounting
practices.
The company has played down the criticism, saying it is
extremely conservative in booking the value of new potential fields
and wells. That reduces its exposure to write-downs if the assets
later prove to be worth less than expected, it says.
Exxon's ability to avoid write-downs—and potential losses that
come with them—has been among the factors helping the company
outperform rivals since prices began falling in mid-2014. Exxon
shares have fallen by about half of the average of top peers
Chevron Corp., Royal Dutch Shell PLC, Total SA and BP PLC. Since
2014, those companies have booked more than $50 billion overall in
write-downs and impairments.
Yet Exxon has lost money for six straight quarters in its U.S.
drilling business. The company had to remove the equivalent of more
than 900 million barrels of U.S. natural gas reserves from its
books in 2015, an acknowledgment that wells on those properties
cannot currently be economically drilled. When it agreed to
purchase shale explorer XTO Energy Inc. in 2009 for $31 billion,
natural gas sold for almost double what it does now.
For many producers, such losses in net income and reserves would
make write-downs inevitable, but Exxon didn't write down the
overall value of its reserves. The lack of such a step at Exxon
"raises serious questions of financial stewardship," Paul Sankey,
an oil analyst at Wolfe Research, wrote last month.
"It is impossible to believe that no assets have been impaired,"
he said.
The process for booking oil and gas reserves, and recognizing
when they fall, is separate from accounting for how the value of
those reserves changes over time on a company balance sheet.
John Herrlin, an analyst at Socié té Gé né rale, came to a
different conclusion in an investor note last month, writing that
about three fourths of Exxon's reserves are from areas with
producing wells, a factor that makes impairments less likely than
in undeveloped areas.
Exxon Chief Executive Rex Tillerson told trade publication
Energy Intelligence last year that the company has been able to
avoid write-downs because it places a high burden on executives to
ensure that projects can work at lower prices, and holds them
accountable.
"We don't do write-downs," Mr. Tillerson told the publication.
"We are not going to bail you out by writing it down. That is the
message to our organization."
Out of the 40 biggest publicly traded oil companies in the
world, Exxon is the only one that hasn't booked any impairments in
the last 10 years, according to S&P Global Market
Intelligence.
In 2013, the U.S. Securities and Exchange Commission asked Exxon
why it hadn't booked any impairments in the previous year, citing a
speech Mr. Tillerson gave in June 2012 in which he said the company
was making "no money" due to declining natural-gas prices.
Exxon's response then mirrors its position now: That short-term
price fluctuations aren't enough to render worthless wells that
would potentially be drilled over decades. Another key to the
company's assessment is the view that its assets will hold value
when prices eventually rebound.
Natural gas rose substantially in 2013 after the SEC's inquiry,
but many oil executives and forecasters have said they expect
prices to remain low for some time.
Last year, Exxon scrutinized its assets most at risk for
impairment and found that future cash flows anticipated from its
fields were "substantially" higher than the book value of the
asset. Exxon "does not view temporarily low prices or margins as a
trigger event for conducting impairment tests," according to a
company filing.
The company is known for its conservatism in recognizing the
value of reserves, a practice that results in lower write-downs,
said Sean Heinroth, a principal in the energy practice at
management consultancy A.T. Kearney. Exxon is also known for
rigidly interpreting regulations and sometimes pushing back against
regulators if company leaders feel their practices follow the law,
he said.
"I would have expected some write-downs, even to avoid being
called out on it, on being the last company not to have
write-downs," he said.
Exxon has previously faced a lawsuit over its impairment
practices. Plaintiffs including the Ohio state pension system
alleged in a 2004 class-action suit that the company's failure to
impair its properties undercut shareholders of Mobil Corp. in the
1999 deal that combined the companies.
The suit alleged that Exxon should have seen write-downs of
between $3 billion to $7 billion in the late 1990s, another period
of historically low prices. It included an allegation from a former
Exxon insider that the company "operated under an order" by former
Chief Executive Lee Raymond that "no impairment would be
recorded."
Exxon denied the allegations. The lawsuit was dismissed because
the statute of limitations on such claims had passed.
Dave Michaels contributed to this article.
(END) Dow Jones Newswires
September 16, 2016 06:45 ET (10:45 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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