What stocks to invest in = the investigation of Exxon’s (XOM) oil and gas reserves « PRACTICAL STOCK INVESTING



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The Wall Street Journal has recently reported that the New York attorney general and the SEC are investigating whether the accounting XOM gives of its oil and gas reserves in its annual 10k filing is accurate.

There appear to be two points to the probes:

–the SEC wants to know if/how XOM has factored the cost of increasing environmental regulations into its evaluations

–the NY attorney general observes that other publicly traded oil and gas companies have written off $200+ billion from the balance sheet carrying value of their exploration and development assets.  XOM has done none.  He wants to know how that’s possible.

oil and gas balance sheets


These are very murky waters, for a number of reasons:

–there probably isn’t any “right” way to account for future environmental regulations.  It’s possible the SEC just wants to send a message to the industry to do something

–balance sheet writedowns aren’t required when assets become less profitable, which they obviously have as oil prices have plunged, but only when they become unprofitable.  For oil and gas fields that may have decades of future life, this requires some judgment about what future selling prices and costs will likely be

–the unprofitability test isn’t done well by well or even field by field.  It can be done for pools of assets that are as big as a given country.  For a mature company like XOM this will mean a pool can contain not only fields put into production two years ago but also ones from the 1960s, when crude went for $1 a barrel.  It’s possible that XOM has simply not been as aggressive (read: reckless) as its peers in chasing discoveries that are only viable with oil selling for over $100 a barrel.

supplementary present value disclosure

There is also another–more significant, in my view– set of calculations of the present value of oil and gas reserves that each company is required to include in its 10k.  This is a standardized measure with fixed assumptions.  The most important are that selling prices are assumed to be constant at those of the time of the report, and the discount factor to be used is a whopping 10%.

On this measure, XOM has already written down the present value of its oil and gas holdings by a gigantic amount.  From December 2012 on, the figures are as follows:

2012          $225 billion

2013          $220 billion

2014          $208 billion

2015          $71 billion.

Based on the 2015 figure it’s hard to make an argument that XOM is somehow covering up the loss in value it has experienced with the fall in oil prices.

 

– What stocks to invest in

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