What happened
Shares of ExxonMobil (XOM 1.02%) declined by as much as 6% by 10:45 a.m. EST on Friday. Weighing on the oil stock was a Wall Street Journal report that the Securities and Exchange Commission has launched an investigation of the company.
So what
According to the Journal, an Exxon employee filed a whistleblower complaint against the company last fall, alleging that it overvalued its assets in the Permian Basin. The company reportedly forced employees to use unrealistic assumptions in an internal assessment in 2019 about how quickly it could drill new wells in the region to arrive at a higher valuation for its properties. Exxon reportedly fired at least one of the employees who complained about this aggressive approach.
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Some of the company's managers initially estimated that the net present value (NPV) of its properties in the Delaware Basin was $60 billion. However, some employees involved in the planning reportedly put the NPV of those assets at around $40 billion. That discrepancy is leading the SEC to investigate if the company misled investors about the value of these assets.
As it turns out, Exxon won't be able to achieve its original ambitious goal to expand its oil and gas output in the region to 1 million barrels of oil equivalent per day by 2025 due to much lower-than-expected oil prices. That slump forced the company to significantly reduce its capital spending program, affecting its ability to grow its output in that region. Thus, the assets are likely worth much less than the company's optimistic assessment.
Now what
ExxonMobil's stock had been on a tear this year, fueled by higher oil prices and increasing bullishness by analysts who follow the company. Even after today's slide, shares are up more than 15% on the year. While the SEC investigation will likely weigh on the company until it's resolved, oil prices will remain the main driver for Exxon this year. If crude maintains its upward trajectory, shares could continue rallying. If not, the stock could give back its recent gains. Because of that, investors need to keep a close eye on crude prices since they hold the key to Exxon's future.
