Exxon Is Big Oil's Outlier In The Post-Pandemic World

While oil majors stuck to spending discipline after the 2015-2016 price crash, ExxonMobil was the one to stand out from the crowd as it increased capital expenditures to boost production. 

This year, in the second price collapse in four years, Exxon again appears to be the outlier in Big Oil as it is not writing down billions of U.S. dollars of asset values and continues to resist calls from sustainability-conscious investors to disclose price forecasts and account for climate change in the value of its assets and its future business.

Unlike its peers, Exxon hasn’t booked major writedowns since oil prices crashed earlier this year. And unlike its European peers, the U.S. supermajor hasn’t pledged any emission-reduction targets, either.

The lack of double-digit-billion writedowns at Exxon not only this year, but also in the past decade, raises two questions: does Exxon think that oil and gas prices will ultimately rise and therefore its assets fairly valued at a later date? Or has Exxon been doing some creative accounting in valuing its assets?

No Major Write Downs: Wishful Thinking Or Accounting Fraud?

Unlike Occidental, BP, and Shell, Exxon hasn’t yet adjusted the value of its assets, and hasn’t been doing much of that over the past decade.       

Franklin Bennett, a former senior accounting analyst at Exxon, alleges that the supermajor’s stubborn refusal to write down a large part of the value of natural gas producer XTO Energy Inc that it bought for US$31 billion ten years ago is part of an “arrogant, aberrant, long-standing…posture,” The Wall Street Journal reported this week, citing a complaint Bennett has filed with the SEC under its whistleblower program. 

According to Bennett, who left Exxon in 1995, the way Exxon accounted for the XTO deal fits its previous accounting practices of overestimating the value of its oil and gas assets. Bennett believes that the value of XTO should be written down by at least US$17 billion and that Exxon should make at least US$20 billion in writedowns on its other oil and gas assets.

Exxon’s CEO at the time of the XTO acquisition, Rex Tillerson, admitted last year that “We probably paid too much,” because the outlook on gas prices was for them to stay at around US$5 per million British thermal units (MMBtu).

“Of course, it never saw those numbers again,” Tillerson said at a conference in June 2019.

Commenting on Exxon’s impairment accounting practices, Exxon spokesman Casey Norton told the Journal:

“Exxon Mobil’s record on impairments and our rigorous and consistent process for testing for impairments have been repeatedly scrutinized and upheld.”

Exxon has long explained the lack of huge writedowns – compared, for example, to Chevron’s US$11-billion impairment charge in Q4 2019 mostly in Appalachian natural gas – with the fact that it books the value of new oil and gas fields very conservatively and doesn’t adjust values to short-term price trends.

Last year, Exxon was found not guilty in a lawsuit brought by the state of New York, alleging the company had misled investors by failing to account for climate change in its disclosures.

Investors Press Exxon For Climate-Risk Disclosures

But investors have upped the pressure on Big Oil to start accounting for climate change in its price assumptions. European majors have listened, and just last month, they lowered their oil price forecasts, which led to up to US$17.5 billion impairment charge at BP and up to a US$22 billion charge at Shell.

Exxon and Chevron, however, do not disclose their price assumptions. But their environment-conscious investors want this to change, investor coalition Ceres, the New York State Common Retirement Fund, and California State Teachers’ Retirement System, told Bloomberg this week. 

The investors want to know how U.S. Big Oil is viewing the impact of climate change and the energy transition on its assets and future business. Chevron views future scenarios as proprietary information, spokesman Sean Comey told Bloomberg in an emailed statement.

At this year’s shareholder meetings of the two U.S. oil giants, shareholders were asked to vote on climate-related issues proposed by investors.

Exxon’s shareholders rejected proposals for a report on lobbying and a report on the risks of petrochemical investments.

A shareholder proposal at Chevron, urging it to report on climate lobbying aligned with Paris Agreement Goals, however, passed, as some 53 percent of the votes cast voted for the proposal to report on climate lobbying.

BlackRock, for example, pushed for more climate action and transparency at Exxon and Chevron, after the world’s biggest asset manager said earlier this year that it would place sustainability at the center of its investment approach.

“As we have discussed during our most recent conversations with Exxon Mobil Corporation (Exxon), we continue to see a gap in the company’s disclosure and action with regard to several components of its climate risk management,” BlackRock said in its rationale for voting contrary to Exxon’s board’s recommendations.

After Exxon’s meeting, Edward Mason, Head of Responsible Investment for the Church Commissioners for England, said:

“Exxon needs to join its peers and set out a strategy for transition to net zero emissions. Investors will not tolerate a board that is not capable of steering a course consistent with the goals of the Paris Agreement.”

“We believe that ExxonMobil can do so much better, and that a change in strategy and governance can bring about a long overdue improvement in shareholder returns,” The New York State Common Retirement Fund and The Church Commissioners for England said in a letter to shareholders before the meeting.

An Ocean Apart

“Exxon, in particular, has made itself an outlier for its refusal to seriously account for the demands of a lower carbon global economy,” New York State Comptroller Thomas DiNapoli said, commenting on the voting results at the annual shareholders’ meetings of U.S. companies this year.

With very little writedowns on asset values and with no emissions targets, Exxon looks increasingly distant from the European oil majors, many of which have pledged to become net-zero energy companies by 2050.