XOM Exxon Mobil Corp

By Bradley Olson and Lynn Cook 

Exxon Mobil Corp. warned that it may be forced to write off nearly 20% of its future oil and gas prospects due to low prices, a comedown for a company that hasn't cut asset values during the grueling energy bust.

Under investigation by the U.S. Securities and Exchange Commission and New York state over its accounting practices -- and the impact of future climate change regulations on its business -- Exxon on Friday disclosed that some 4.6 billion barrels of oil in its reserves, primarily in Canada, may no longer be profitable to produce.

Exxon is facing near- and long-term threats as it seeks to exploit the full value of a vast oil and gas portfolio that stretches from Texas to the Caspian Sea, and deliver the handsome dividends that its shareholders have come to expect since it was part of John D. Rockefeller's Standard Oil.

Today, the company is suffering amid a two-year plunge in oil prices that has a barrel trading for around $50, a level Chief Executive Rex Tillerson believes may linger as U.S. shale producers ramp up at the first uptick in prices, prolonging the current glut and putting a ceiling on any price upswing.

Longer term, it faces headwinds from new regulations aimed at reducing carbon dioxide emissions, measures widely expected to fall most heavily on the fossil fuels industry.

Earlier this year, Exxon lost the triple-A bond rating it had held from Standard & Poor's Rating Services since 1930, a standing of creditworthiness shared with just two other companies, Microsoft Corp. and Johnson & Johnson. Last year, it failed to find enough new oil and gas to replace what it produced for the first time in two decades. Its profits in the last 12 months are the lowest since 1999, before Exxon merged with Mobil Corp.

Exxon is alone among major oil companies in not having written down the value of its future wells as prices fell. It now plans to examine its assets to test whether they are worth less than carried on its books, under rules governed by accounting standards. The company said the 20% reserves reductions, which are governed by SEC rules, may be necessary based on the average 2016 price by the end of the year, though higher prices in November and December could mitigate the extent of the decline.

In an investor call on Friday, Exxon declined to discuss potential reserve write-offs or accounting write-downs in detail beyond the initial statement. The SEC declined to comment on Exxon's disclosure.

"Exxon has long been the best at what they do, but these external constraints are putting them more in line with everyone else, forcing them to the level of their competitors," said Sean Heinroth, a principal in the energy practice at management consultancy A.T. Kearney.

Though Exxon didn't mention climate change or regulators in its disclosure, most of the assets it said it may not be able to develop are among the most scrutinized by climate change activists: Canada's oil sands.

Since 1999, energy companies have invested more than $200 billion in Alberta's oil sands, which has the third largest oil reserves behind Venezuela and Saudi Arabia, says the Canadian Association of Petroleum Producers.

Nine of the world's top oil companies, including Exxon, Chevron and Royal Dutch Shell PLC, have been counting on wringing more Canadian crude from the ground in the coming decades. Combined, Canadian crude accounts for 23% of the firms' proven reserves, according to data from investment bank Peters & Co. -- up from only 5% in 2006.

New investments in the oil sands may be much harder to come by after Exxon's announcement, said Andrew Logan, director of the oil and gas program at Ceres, a Boston-based nonprofit that has pushed Exxon and other companies for better disclosure on the potential impact of climate change on the energy business.

"Why would any company invest billions of dollars in a new oil sands project now, given the near certainty that the world will be transitioning away from fossil fuels during the decades it will take for that project to pay back?" Mr. Logan said.

The potential loss of reserves has broad ramifications for Canada, which depends on the development of its crude stores to support its economy, but like other western countries has been moving to strengthen regulations to address climate change. Canadian Prime Minister Justin Trudeau earlier this month unveiled a national carbon-pricing proposal, sparking an immediate clash between the national government and the province of Alberta.

The Liberal government's proposal to charge a price for carbon emissions compounds the headwinds energy companies already face if they want to mine Canada's oil sands for decades to come.

Amy Myers Jaffe, executive director for Energy and Sustainability at University of California, Davis, said Exxon's warning signals it doesn't believe oil prices will rise significantly in the near future.

"This company had positioned itself for growth and oil sands were a key part of its strategy," she said, adding: "If lots of companies have to do write downs on their Canadian reserves, it sends a gloomy message about the oil sands."

Exxon's other major obstacle: U.S. competition. Advanced shale drilling techniques have unleashed a new wave of American oil. That has made smaller American companies the industry's swing producers able to ramp up quickly as prices rise.

Exxon shares fell 2.5% to $84.78 at 4 p.m. in trading on Friday after reporting a 38% decline in quarterly profit compared with a year ago.

Write to Bradley Olson at Bradley.Olson@wsj.com and Lynn Cook at lynn.cook@wsj.com

(END) Dow Jones Newswires

October 28, 2016 16:58 ET (20:58 GMT)

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