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The Securities and Exchange Commission is currently investigating ExxonMobil (NYSE: XOM) on two charges: (1) giving industry-changing outlooks on oil for decades while sweeping evidence of global warming under the rug, and (2) possibly not correctly reporting written-down assets.
In this clip from Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman look at the evidence we have so far behind the charges, what this might mean for ExxonMobil, what the company has to say in its defense (and how much to make of it), and how worried shareholders should be about these charges for the short and long term.
A full transcript follows the video.
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This podcast was recorded on Sept. 22, 2016.
Sean O'Reilly: What we do need to talk aboutisExxonMobil.
Taylor Muckerman:Yeah,making our lives shorter by denying climate change.
O'Reilly:Notonly that,but accounting shenanigans, too. What are these guys doing?
O'Reilly:Supposedly, yeah. What's going on?
Muckerman:I guess the SEC had acurrent investigation trying to decidewhether or not Exxon has defrauded shareholders bydenying impact of climate changeon their business. This week, the SEC andthe attorney general for New York City are now adding to thatwhether or not they've properly written-down assetsduring the latest downturn. And,I guess not properly written down assets,but whether they should have written down anything,because the industry, since 2014,has basically written off around $200 billion worth of assets.
O'Reilly:Everybody'sreserves have fallen by half,because reserves are based upon -- for our listeners, we've done an episode on PV10, that's the present value of reserves. Everybody's beenwriting down this stuff by halfbecause inputin that calculation is the price of oil.
O'Reilly:It's very odd. Youactually go to their balance sheet,and their assets haven't really changed in the last five years.(laughs)
Muckerman:Even before that, this has just been a theme of the business. In the '90s, I think,there was a class action lawsuit from Mobilshareholders when Exxon was trying to take on Mobil. Obviously, they did,because they're nowExxonMobil. But they didn't write downtheasset value when oil prices slid, then, either. So, Mobil shareholdersfelt like Exxonshares were overvalued, so they weren't really getting...
O'Reilly:How did that conclude? It was merged, obviously, but...?
Muckerman:I'm assuming the ExxonMobil law team is pretty good at their job, because...
O'Reilly:Do you think they have good lawyers? Do you?(laughs)
Muckerman:...it reached the statute of limitations with no decision. So, it just expired.
Muckerman:Now, though,if you look at Exxon and think, "Oh, $200 billion in writedowns, maybe it's the smaller players," no. If you combineShell,Chevron,BP, andTotal, they've written off $50 billion worth of assets since the downturn started in November of 2014.
O'Reilly:And you have Exxon here, December 31st, 2014, total assets $349.5 billion. 2015, $336 billion. What, $12 billion? What's going on here?
Muckerman:Basically,when you look at an oil company,the reserves are what you're investing in. If they have to write down the value of the reserves,the company is far less valuable to shareholders. But they have said,in response to this, that they're generallypretty conservativewhen booking reserves values. So,they're saying maybe there's not much to write down, because they booked it moreconservatively than their competitors. And then, they say theseshort-term fluctuations in price don't impactthe long-term value of the reserves. Which is probably true, to some degree. Butthe entire industry is writing down their reserves. They could obviously bring the asset value backonce the price rises. But they're just not willing to take this temporary hit.
O'Reilly:That'swhat I really wanted to talk to you about. When I saw this, I was like, "Haha, that's funny," because one, I had seen the balance sheet, and it hasn't changed, so there's that. Buton the other hand,Exxon is known for having theseenormous longtail projects. Is there an argument to be made thereon their behalf that, bottom line, these hugelongtail projects,offshore, they're going to take years to develop, they're going to get oil out of them for 20-30 years, the cost of oil,to get that out of the ground, will eventually be super low, so they don't think they need to write this down?
Muckerman:Yeah,that's probably pretty fair. They're a fairly low-costproducer, because they have a lot of conventional resources,like you mentioned,projects that are supposedly going to last decades. I could see some validity there,but when you look at peers writing down $50 billion between four of them, and Exxon doing nothing... I'd scratch my head a little bit. Whether or not anything happens, if it's going to impact shareholders negatively, I don't think so,just because of the strength of their balance sheet. They have one of the strongest credit ratingsof any company in the world. So I wouldn't be too nervous,if I was a shareholder of Exxon. Butit's just another feather in their capof shady business.
O'Reilly:Fun stuff, yeah. Andregarding the climate change investigation and all that... that,however you want to frame it,it's been going on for decades, then.
Muckerman:Well,not the investigation...
O'Reilly:No, yeah,the fact they're denying it,or however you want to say it.
Muckerman:They've known about it,because they found documents a while agofrom the seventies and eightiesfrom some of their head scientists and head engineersthat support the fact that climate changeis happening. But they swept those under the rug.
O'Reilly:Thisreminded me of the tobacco industry.(laughs)
Muckerman:It'simpactful on their business,so that's what that original investigation is for --not necessarily financially,but whether or not they're beingup front with their shareholders. Exxon, traditionally,produces outlooksfor the industry that go out 20, 30 years.
O'Reilly:For oil consumption.
Muckerman:For oil consumption, foroil production, everything in the energy sector. Natural gas, as well. So when you have this company going out andprojecting the next 20 to 30 years of the energyindustry on a consistent basis,and they're not acknowledging climate change,that could lead people astray.
O'Reilly:Wow. So,you're not worried about XOM?
Muckerman:Notbecause of this, no. If they have to write it down, sure,that's a temporary hit. But again, if oil prices rise,they can adjust the value of those assets again. Andif there's a fine, I would imagine it would be in the millions, maybe tens or hundreds of millions, but even still, you'retalking about the largest energy companyin North America.
Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. The Motley Fool recommends Chevron and Total. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.