Oil slump results in lowest annual profit in 20 years; company dogged by SEC probe

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.

Irving, Texas-based Exxon reported a 40% drop in fourth-quarter earnings, as low oil and natural-gas prices also took a toll on the company. Annual 2016 profit totaled $7.8 billion -- Exxon's lowest since 1996, three years before the company 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

February 01, 2017 02:47 ET (07:47 GMT)

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