The Securities and Exchange Commission is currently investigating ExxonMobil (XOM 0.24%) on two charges: (1) giving industry-changing outlooks on oil for decades while sweeping evidence of global warming under the rug, and (2) possibly not correctly reporting written-down assets.
In this clip from Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman look at the evidence we have so far behind the charges, what this might mean for ExxonMobil, what the company has to say in its defense (and how much to make of it), and how worried shareholders should be about these charges for the short and long term.
A full transcript follows the video.
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This podcast was recorded on Sept. 22, 2016.
Sean O'Reilly: What we do need to talk about is ExxonMobil.
Taylor Muckerman: Yeah, making our lives shorter by denying climate change.
O'Reilly: Not only that, but accounting shenanigans, too. What are these guys doing?
O'Reilly: Supposedly, yeah. What's going on?
Muckerman: I guess the SEC had a current investigation trying to decide whether or not Exxon has defrauded shareholders by denying impact of climate change on their business. This week, the SEC and the attorney general for New York City are now adding to that whether or not they've properly written-down assets during the latest downturn. And, I guess not properly written down assets, but whether they should have written down anything, because the industry, since 2014, has basically written off around $200 billion worth of assets.
O'Reilly: Everybody's reserves have fallen by half, because reserves are based upon -- for our listeners, we've done an episode on PV10, that's the present value of reserves. Everybody's been writing down this stuff by half because input in that calculation is the price of oil.
Muckerman: Yeah. Exxon?
O'Reilly: It's very odd. You actually go to their balance sheet, and their assets haven't really changed in the last five years. (laughs)
Muckerman: Even before that, this has just been a theme of the business. In the '90s, I think, there was a class action lawsuit from Mobil shareholders when Exxon was trying to take on Mobil. Obviously, they did, because they're now ExxonMobil. But they didn't write down the asset value when oil prices slid, then, either. So, Mobil shareholders felt like Exxon shares were overvalued, so they weren't really getting...
O'Reilly: How did that conclude? It was merged, obviously, but...?
Muckerman: I'm assuming the ExxonMobil law team is pretty good at their job, because...
O'Reilly: Do you think they have good lawyers? Do you? (laughs)
Muckerman: ...it reached the statute of limitations with no decision. So, it just expired.
O'Reilly: Wow! OK.
Muckerman: Now, though, if you look at Exxon and think, "Oh, $200 billion in writedowns, maybe it's the smaller players," no. If you combine Shell, Chevron, BP, and Total, they've written off $50 billion worth of assets since the downturn started in November of 2014.
O'Reilly: And you have Exxon here, December 31st, 2014, total assets $349.5 billion. 2015, $336 billion. What, $12 billion? What's going on here?
Muckerman: Basically, when you look at an oil company, the reserves are what you're investing in. If they have to write down the value of the reserves, the company is far less valuable to shareholders. But they have said, in response to this, that they're generally pretty conservative when booking reserves values. So, they're saying maybe there's not much to write down, because they booked it more conservatively than their competitors. And then, they say these short-term fluctuations in price don't impact the long-term value of the reserves. Which is probably true, to some degree. But the entire industry is writing down their reserves. They could obviously bring the asset value back once the price rises. But they're just not willing to take this temporary hit.
O'Reilly: That's what I really wanted to talk to you about. When I saw this, I was like, "Haha, that's funny," because one, I had seen the balance sheet, and it hasn't changed, so there's that. But on the other hand, Exxon is known for having these enormous longtail projects. Is there an argument to be made there on their behalf that, bottom line, these huge longtail projects, offshore, they're going to take years to develop, they're going to get oil out of them for 20-30 years, the cost of oil, to get that out of the ground, will eventually be super low, so they don't think they need to write this down?
Muckerman: Yeah, that's probably pretty fair. They're a fairly low-cost producer, because they have a lot of conventional resources, like you mentioned, projects that are supposedly going to last decades. I could see some validity there, but when you look at peers writing down $50 billion between four of them, and Exxon doing nothing... I'd scratch my head a little bit. Whether or not anything happens, if it's going to impact shareholders negatively, I don't think so, just because of the strength of their balance sheet. They have one of the strongest credit ratings of any company in the world. So I wouldn't be too nervous, if I was a shareholder of Exxon. But it's just another feather in their cap of shady business.
O'Reilly: Fun stuff, yeah. And regarding the climate change investigation and all that... that, however you want to frame it, it's been going on for decades, then.
Muckerman: Well, not the investigation...
O'Reilly: No, yeah, the fact they're denying it, or however you want to say it.
Muckerman: They've known about it, because they found documents a while ago from the seventies and eighties from some of their head scientists and head engineers that support the fact that climate change is happening. But they swept those under the rug.
O'Reilly: This reminded me of the tobacco industry. (laughs)
Muckerman: It's impactful on their business, so that's what that original investigation is for -- not necessarily financially, but whether or not they're being up front with their shareholders. Exxon, traditionally, produces outlooks for the industry that go out 20, 30 years.
O'Reilly: For oil consumption.
Muckerman: For oil consumption, for oil production, everything in the energy sector. Natural gas, as well. So when you have this company going out and projecting the next 20 to 30 years of the energy industry on a consistent basis, and they're not acknowledging climate change, that could lead people astray.
O'Reilly: Wow. So, you're not worried about XOM?
Muckerman: Not because of this, no. If they have to write it down, sure, that's a temporary hit. But again, if oil prices rise, they can adjust the value of those assets again. And if there's a fine, I would imagine it would be in the millions, maybe tens or hundreds of millions, but even still, you're talking about the largest energy company in North America.