Critics say company is deceiving investors by not slashing value
of large XTO acquisition
By Christopher M. Matthews
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 1, 2020).
As its peers write down U.S. shale assets by billions of dollars
amid lower oil and gas prices, Exxon Mobil Corp. stands
increasingly alone in not adjusting the value of its holdings.
Rivals, including BP PLC, Hess Corp. and Occidental Petroleum
Corp., have recently taken multibillion-dollar impairments as a
coronavirus-induced economic slowdown adds pressure to an already
struggling shale sector. Chevron Corp. took a $10 billion
write-down in December, and Royal Dutch Shell PLC said Tuesday that
it would write down the value of its assets by up to $22 billion
because of lower energy prices.
Exxon has yet to write down any shale assets this year, holding
to a belief that oil and gas values will eventually rebound.
Several oil and gas accounting experts allege that Exxon's
reticence to adjust the value of shale assets on its balance sheet
amounts to accounting fraud. In a series of complaints filed to
U.S. authorities, they argue that the company is deceiving
investors by failing to write down much of the value of XTO Energy
Inc., a natural-gas driller it purchased for $31 billion a decade
ago, along with other assets.
Exxon's refusal to write down its acquisition of XTO is part of
an "arrogant, aberrant, long-standing...posture" at the company,
said one of the accountants, Franklin Bennett, a former senior
accounting analyst in Exxon's oil and gas business, in a complaint
filed under the Securities and Exchange Commission's whistleblower
program that was viewed by The Wall Street Journal. Mr. Bennett
left Exxon in 1995, well before the XTO deal, but maintains the
company's accounting of the acquisition fits with its past practice
of handling assets that might be worth less than anticipated.
An Exxon spokesman said the company is in compliance with
accounting rules and SEC regulations about disclosures to
investors.
When Exxon announced its plans to acquire XTO in December 2009,
the company's second-largest deal ever, U.S. natural-gas prices
averaged $5.35 per million British thermal units. But over the past
five years, gas prices have mostly stayed below $3/MMBtu.
Gas prices hit a 25-year low last week, but have risen in recent
days, closing Tuesday at $1.75/MMBtu. Future contracts for U.S.
natural gas average about $2.50/MMBtu or lower for the next four
years. BP estimated in February that U.S. gas prices could be
around $2/MMBtu for the next 20 years.
"We probably paid too much," former Exxon Chief Executive Rex
Tillerson said of the XTO deal at a conference last year.
Exxon wrote down the value of U.S. shale gas assets by $2.5
billion in late 2017. Critics of the company, including some
analysts, have questioned whether that was sufficient, noting the
price of the XTO deal.
The U.S. shale industry has written down more than $450 billion
in assets since 2010, according to a June report by Deloitte,
reassessing holdings amid a global supply glut and growing investor
concerns about the long-term future of fossil fuels. The accounting
firm projects additional shale impairments of as much as $300
billion in coming months as the coronavirus holds down commodity
prices.
Exxon has announced about $6.5 billion in write downs since
2014, according to S&P Global Market Intelligence, far less
than similarly sized competitors. Chevron has taken $16.7 billion
in impairments during the same period.
Mr. Bennett, a practicing securities-law attorney, served as a
committee chairman for the professional society for oil and gas
accountants in the U.S. and Canada. He first filed a complaint with
the SEC in 2015, which he said was based on his knowledge of
historic Exxon accounting practices and analysis of its
disclosures. He and a group of accountants, including a former
partner in the oil and gas practice of a major U.S. accounting
firm, have subsequently sent the regulator 30 supplements,
including one this month, according to documents viewed by the
Journal.
He said in the complaint that Exxon should be writing down the
value of XTO by at least $17 billion and impairing at least $20
billion in other assets, depending on how it has booked the
details. He also has sent his complaint to the Justice
Department.
Under the SEC's whistleblower program, which covers more than
cases involving firsthand claims of wrongdoing, Mr. Bennett could
be compensated if the government takes action on his complaint.
Tipsters can receive between 10% and 30% of any penalty collected
as a result of providing original information.
Casey Norton, an Exxon spokesman, said the company's accounting
practices withstood scrutiny when Exxon won a case in 2019 in which
it was accused by New York's attorney general of failing to inform
investors about the impact of climate change on its assets. He
noted that the SEC also had dropped a similar investigation about
whether Exxon misled investors on climate-change disclosures in
2018.
"Exxon Mobil's record on impairments and our rigorous and
consistent process for testing for impairments have been repeatedly
scrutinized and upheld," Mr. Norton said.
The SEC and the Justice Department declined to comment.
Exxon has long played down questions about its lack of asset
write-downs, saying it is able to avoid them because it is
extremely conservative in initially booking the value of new fields
and wells and doesn't respond to short-term commodity-price
fluctuations. Before 2016, Exxon had never recognized an asset
impairment under U.S. accounting rules implemented in the
1990s.
The XTO complaint isn't the first time Mr. Bennett has contested
the company's write-down policies. He was part of a 2004 lawsuit
involving the Ohio state pension system and others who alleged that
Exxon's failure to impair its properties undercut shareholders of
Mobil Corp. in the 1999 deal that combined the companies.
Exxon denied the allegations. A federal judge dismissed the
suit, finding the plaintiff's didn't sufficiently allege a fraud,
and an appeals court upheld the dismissal because the statute of
limitations on such claims had passed.
Write to Christopher M. Matthews at
christopher.matthews@wsj.com
(END) Dow Jones Newswires
July 01, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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