By Bradley Olson
Exxon Mobil Corp. said Tuesday it wrote down the value of more
than $2 billion in U.S. assets, departing from decades-long
practice amid an investigation by securities regulators, as the
world's largest publicly traded oil company posted its lowest
yearly earnings in 20 years.
The move follows an investigation begun by the U.S. Securities
and Exchange Commission in August over Exxon's accounting practices
and how the company values its future oil and gas wells, or
reserves. The probe also sought information about how Exxon weighs
the potential impact that climate-change regulations could have on
its business, The Wall Street Journal reported in October.
An SEC spokesman declined to comment on Tuesday. Exxon has said
it is cooperating with the probe and that its financial reporting
meets all legal and accounting standards.
Irving, Texas-based Exxon reported a 40% drop in fourth-quarter
earnings, and annual 2016 profit of $7.8 billion -- the company's
lowest since 1996, three years before it grew immensely with an $82
billion deal to buy rival Mobil Corp.
Exxon was alone among major energy companies in not having
recognized on its books any reduction in the value of its reserves,
a development that had become fairly routine for peers as prices
crashed in recent years. Since 2014, other U.S. companies have
slashed the value of their assets by more than $200 billion,
according to S&P Global Market Intelligence.
"The impairment appears a bit light given the company's
resources," said Brian Youngberg, an energy analyst with Edward
Jones in St. Louis. Exxon shares fell 1.1% to $83.89 on Tuesday,
while peers such as Royal Dutch Shell PLC either rose or held
roughly flat.
Exxon wrote down natural-gas assets in the Rocky Mountains. The
company purchased shale producer XTO Energy for $31 billion in 2010
during the heart of a drilling boom that would send natural-gas
prices careening downward within a few years. The price, which
averaged $5.35 per million British thermal units when the deal was
announced late in 2009, is now about $3.23.
The SEC investigation initially sprung out of a separate
examination begun in late 2015 by New York Attorney General Eric
Schneiderman into Exxon's history of advocacy about global warming
and how the company has communicated with its investors on the
matter. Exxon, which has denied wrongdoing and characterized that
probe as politically motivated, submitted more than one million
pages of documents to the New York Democrat, most of which have
been shared with the SEC, according to people familiar with the
matter.
Exxon hadn't booked a decline in the value of its assets since
at least 1990. This is due in part to the company's practice of
being more conservative when initially recognizing the value of new
oil and gas that it discovers, according to analysts and people
familiar with its accounting.
It is also related to a management view that it is better to
place a high burden on executives to ensure that projects can work
at lower prices than to write down their value. The company's
senior leaders wanted to avoid write-downs because in accounting
terms, they have the effect of making the company's investments
appear more profitable, according to people familiar with Exxon's
practices.
"We don't do write-downs," former Chief Executive Rex Tillerson
told trade publication Energy Intelligence in 2015. "We are not
going to bail you out by writing it down. That is the message to
our organization."
For the October-to-December period, profit fell to $1.68
billion, or 41 cents a share, from $2.78 billion. Analysts polled
by Thomson Reuters were expecting 70 cents a share. Revenue
increased for the first time in more than two years, rising 2% to
$61 billion.
Debt levels surged to the highest point in company history at
the end of last year as Exxon's operations failed to generate
enough cash to pay for new investments and dividends. Although
Exxon carries relatively low debt relative to its size, the
increase in borrowing prompted Standard & Poor's last year to
strip the company of the perfect triple-A credit rating it had held
since the Great Depression.
Exxon also signaled Tuesday that it is likely to recognize that
as much as 4.6 billion barrels of its reserves, predominantly in
Canada's oil sands, aren't profitable to produce, according to SEC
rules. The reserve losses might be offset somewhat by the company's
new finds last year, Jeff Woodbury, Exxon's vice president of
investor relations, told analysts Tuesday. Those figures would be
finalized and released in the coming weeks, he said.
Although Exxon might no longer qualify those reserves as
"proved" based on SEC rules, Mr. Woodbury said the company wouldn't
alter its operations or change how it manages those assets.
There are separate processes and rules that govern how
oil-and-gas companies book reserves to assure investors that they
are finding new sources of future production and how they value
them on company financial statements. The SEC requires companies to
evaluate their future prospects based on the average price of the
previous year, in this case about $43 a barrel. That is a 15% drop
from 2015.
Recognizing how much those reserves are worth is separately
overseen by the Financial Accounting Standards Board, an
independent group that sets accounting standards for U.S. public
companies. As oil and gas producers spend money drilling new wells,
those expenses can be capitalized as an asset. But when expected
future cash flow from the reserves is no longer greater than their
so-called carrying value, which relates to the amount that was
capitalized, the rules indicate that a write-down is needed.
Thus, while the Canadian reserve losses didn't result in a
write-down immediately, there is still a chance that could happen
next year. According to the accounting rules, such a determination
would depend in part on Exxon's view of future prices in coming
decades.
Last year, the company reduced its reserves by the equivalent of
more than 800 million barrels, most of which stemmed from U.S.
natural-gas assets. The $2 billion impairment this year was also
tied to U.S. natural-gas wells.
Imperial Oil, an Exxon-controlled company that operates in
Canada, reported that its oil-production business posted a profit
of about $80 million. If the company's oil-sands business continues
to operate profitably, a write-down might not be needed.
Exxon Chief Executive Darren Woods also plans a spending
increase this year, making the company an anomaly among major oil
firms that mostly plan to continue making cuts. Exxon plans to
spend about $22 billion in 2017, about a 15% increase from last
year. Other companies such as Chevron Corp. are continuing to
reduce their investment levels even amid a modest oil-price
rebound.
Mr. Woods, who took the helm in January from Mr. Tillerson after
the longtime Exxon leader was nominated by President Donald Trump
to serve as U.S. secretary of state, pointed to the prolonged
downturn in commodity prices as well as the impairment charge for
the decline in earnings.
--Anne Steele contributed to this article.
Write to Bradley Olson at Bradley.Olson@wsj.com
(END) Dow Jones Newswires
January 31, 2017 17:33 ET (22:33 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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