Written By: Stephanie Williams – Corporate Finance
Why has Exxon Mobil not written down the value of its assets at a time when oil prices have plunged by more than 60 percent since 2014? The US Securities and Exchange Commission is looking into the matter to see if the oil giant could be playing games in the way it reports the valuation of its assets and the impact of its activities on the environment. The SEC has requested information from Exxon to help with its probe. The federal agency has also requested information relating to Exxon from the company’s auditor, PricewaterhouseCoopers, which has preferred to remain mum on the investigation.
After the media reported about the SEC investigations into its accounting practices, Exxon confirmed that it is indeed being probed by the federal securities agency. Exxon spokesman Alan Jeffers said that the company was complying with the request for information it had received from the SEC. However, Jeffers added that Exxon’s financial reporting is above board in the sense that they meet all legal as well as accounting requirements. Though Exxon maintains that its accounting practice is appropriate, it says that the SEC is the right entity to examine its reporting of asset impairment. Exxon is also being probed by the office of the New York Attorney General, with their investigation mainly focusing on the company’s accounting for its environmental impact. But Exxon has protested those investigations.
Depressed oil prices have led many oil companies to write down the value of their oil and gas reserves. Nearly $130 billion in assets has been written down since 2014 by Exxon peers, but Exxon itself has not taken the move, thus raising regulatory eyebrows and stirring anger is some quarters. Exxon doesn’t lack a defense for why it hasn’t taken the cue from its integrated oil company peers to write down the value of its assets in the wake of the oil-price fallout. In its defense, the company cites a conservative strategy to show that it tries to be more prudent than many of its peers when it comes to assessing and reporting the value of its assets. For instance, Exxon says that it uses a very low long-term price assumption when valuing its oil and gas reserves. That means that even if the prices of oil and gas were to plunge the way they have in the last two years, the value of Exxon’s assets doesn’t change much, which is why the company hasn’t followed the trend of its peers of booking asset impairments.
A look at a recent investor update shows that in the period between 2008 and 2015, Exxon suffered after-tax impairments amounting to less than $1 billion. But a look at Exxon’s peers across the US and Europe reveals that they have taken more serious profit hits because of asset impairments, thanks to the collapse of crude prices. For instance, just last October Shell reported an asset write-down of $8.2 billion. Chevron, on the other hand, reported a $1.96 billion impairment last year, and this July it reported another $2.8 billion charge. Oil companies have a way of determining the commercial viability of the projects they undertake. Exxon doesn’t disclose how exactly it reaches its valuation. However, the general range is $20 to $80 per metric ton of carbon. BP determines the commercial viability of its projects by assigning a $40 price per metric ton, and Shell has the same price. What to keep in mind is that when price for carbon is low, the more oil and gas assets become commercially viable. The opposite is true in that assigning carbon a high price can render many assets uneconomic to develop, and that means losses for the company.
Exxon’s nondisclosure of the way it prices carbon has led to protests that the company is not being transparent with how it values its impact on the environment. The matter has now been complicated by Exxon’s failure to write down assets, despite that being the trend everywhere in the energy sector amid downbeat crude prices. The SEC’s request for climate-related information from Exxon signals a shift in the way regulators hope to hold the financial community responsible for their impacts on the environment. That explains why environmental activists are excited by the SEC’s move on Exxon. This move by the SEC to investigate Exxon’s climate-accounting practice comes at a time when calls have intensified for the federal agency to improve the way it assesses climate risk. Environmentalists and lawmakers want the SEC to be more serious about how it holds the likes of Exxon responsible for the roles they play in contributing to global warming.
It is not clear whether the SEC’s probe of Exxon involves other oil majors. However, it could be the beginning of increased regulatory oversight in the energy sector, coming after the signing of the historic Paris Agreement on climate change. If the SEC’s investigations reveal no wrongdoing by Exxon, investor interest in Exxon stock could surge because the company’s business strategy seems to favor long-term investing.