Back in January, when oil was plunging, we reported that the Dallas Fed and the OCC quietly met with US banks and advised them to suspend Mark-to-Market, allowing banks to avoid taking sharp, substantial charge offs on their loan books as a result of the dramatic selloff in crude. Incidentally the Dallas Fed first denied this meeting ever happened, only for its lies to be then revealed by the WSJ and others. That's ok: we - and everyone else - are used to being lied to by the Fed. What was surprising, however, is that neither the Dallas Fed, nor the OCC, told the actual energy majors to similarly fabricate their energy exposure, and yet, in at least in one case, they did.
According to WSJ, the NY Attorney General Eric Schneiderman is probing why Exxon Mobil hasn’t written down the value of its assets, two years into a pronounced crash in oil prices. Indeed, out of the 40 biggest publicly traded oil companies in the world, Exxon is the only one that hasn’t booked any impairments in the last 10 years, according to S&P Global Market Intelligence.
Schneiderman’s office, which as the WSJ notes, has been probing "Exxon’s past knowledge of the impact of climate change and how it could affect its future business", is also examining the company’s accounting practices, according to people familiar with the matter. An Exxon spokesman declined to comment about the investigation by the Democratic attorney general but said Exxon follows all rules and regulations.
To be sure, it is very likely that Scheiderman is merely looking for another career-boosting witch hunt, ideally one which allows him to engage in a long-running legal battle with Exxon, the same way the Democrat launched a probe into Donald Trump's foundation earlier this week, while ignoring the far greater documented fraud committed over nearly 20 years by the Clinton Foundation. Still, it does bring up a good point: while most other energy companies have dramatically reduced and written down the value of their assets, Exxon has been immune, at least in the view CEO Rex Tillerson.
As WSJ notes, "since 2014, oil producers world-wide have been forced to recognize that wells they plan to drill in the future are worth $200 billion less than they once thought, according to consultancy Rystad Energy. Because the fall in prices means billions of barrels cannot be economically tapped, such revisions have become a staple of oil-patch earnings, helping to push losses to record levels in recent years.
And yet, Exxon has so far declined to take any write-downs, the only major oil producer not to do so, which has led some analysts to question its accounting practices.
Maybe the NYAG is on to something?
To be sure, the company has played down the criticism, saying it is extremely conservative in booking the value of new potential fields and wells. That reduces its exposure to write-downs if the assets later prove to be worth less than expected, it says. Then again, not even the most "conservative" company could have factored in oil crashing from $100 to $42 without that impacting the balance sheet.
Needless to say, avoiding reality and Exxon’s "ability" to avoid write-downs, and the massive losses that come with them, has been among the factors helping the company outperform rivals since prices began falling in mid-2014. Exxon shares have fallen by about half of the average of top peers Chevron Corp. , Royal Dutch Shell PLC, Total SA and BP PLC. Since 2014, those companies have booked more than $50 billion overall in write-downs and impairments.
Still, as the WSJ notes, Exxon has lost money for six straight quarters in its U.S. drilling business. The company had to remove the equivalent of more than 900 million barrels of U.S. natural gas reserves from its books in 2015, an acknowledgment that wells on those properties cannot currently be economically drilled. When it agreed to purchase shale explorer XTO Energy Inc. in 2009 for $31 billion, natural gas sold for almost double what it does now. For many producers, such losses in net income and reserves would make write-downs inevitable, but Exxon didn’t write down the overall value of its reserves. The lack of such a step at Exxon “raises serious questions of financial stewardship,” Paul Sankey, an oil analyst at Wolfe Research, wrote last month.
“It is impossible to believe that no assets have been impaired,” he said.
Meanwhile, CEO Rex Tillerson has an unusual explanation why Exxon has refused to write down assets so far: Rex told trade publication Energy Intelligence last year that the company has been able to avoid write-downs because it places a high burden on executives to ensure that projects can work at lower prices, and holds them accountable.
“We don’t do write-downs,” Mr. Tillerson told the publication. “We are not going to bail you out by writing it down. That is the message to our organization.”
Still, while one can debate XOM's business practices, are they really that different from those of banks who are explicitly ordered by a regional Fed to do precisely what Exxon has done for years? More importantly, is it illegal? According to the NYAG, they very well may be:
Mr. Schneiderman has broad powers to investigate corporations under New York state’s Martin Act, which gives the attorney general wide authority in conducting investigations and bringing charges against companies for securities violations. Exxon has already submitted thousands of pages of documents in the probe related to its history of climate science and communications with investors about future prospects. The company has also contested the efforts of other attorneys general to join in the investigation, calling their efforts a fishing expedition that violates its constitutional rights.
For now, however, Exxon is adamant and refuses to succumb to the same accounting treatment that is demanded of all of its peers: last year, Exxon scrutinized its assets most at risk for impairment and found that future cash flows anticipated from its fields were “substantially” higher than the book value of the asset. Exxon “does not view temporarily low prices or margins as a trigger event for conducting impairment tests,” according to a company filing.
In other words, just because it is Too Big To be Held Accountable, Exxon will be fine; why there is only one way crude oil can go in the long run, up. Right?
To be sure, if XOM is wrong and if oil prices don't rebound, it will will pay for it with a sharp drop in its market value. On the other hand, if this latest probe by an all too political, democratic AG is perceived as business interference, the consequences - for the US - could be severe. As one reader put it:
Exxon should move to Ireland or some country that doesn't have rabid Democrats trying to get on the front page of the New York Times, specifically this AG, so they can later run for governor, and have a $1000 a night Washington mistress. No competent CEO with stockholders, bondholders, employees to please has time to futz around with the likes of Schneiderman, a deplorable if there ever was one. Tillerson should lay off a couple of thousand New Yorkers to pay the legal bills for "try them in the media" action. Another example of why investment has been fleeing the Banana Republic Formerly Known as America for the nearest two decades.
Come ot think of it, the assessment is actually quite accurate, if deeply offensive to the sensitivities of a given subset of the population.