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What That Means And Doesn’t Mean

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The taking of impairments to oil and gas assets can become a point of controversy in the oil and gas business, often because they are the result of a complex decisions and judgments made by each individual company about current and future market conditions. As a result of that complexity and the fact that the process is little understood outside of the industry and federal regulators that govern it, media reporting about it can often become sensationalistic and misleading.

Such was the case in the past week with ExxonMobil
, which issued advice to shareholders and investors that, as a part of an overall reassessment of its entire portfolio, a set of natural gas assets currently carrying an assessed value of $25 to $30 billion dollar could see that value written down to some extent. Or not, depending on the outcome of that global portfolio reassessment, whether the company decides to keep those assets in its long-term development plan, and how the company would manage their development into the future.

Here is how ExxonMobil put it in its own disclosure: “Depending on the outcome of the planning process, including in particular any significant future changes to the corporation’s current development plans for its dry gas portfolio, long-lived assets with carrying values of approximately $25 billion to $30 billion could be at risk for significant impairment. If these assets remain in our long-term development plan, similar to previous years, it is unlikely the assets would be subject to material impairment. The company expects to complete this assessment in the fourth quarter.”

Get it? Lots of ‘dependings’ and ‘coulds’ and ‘ifs’ and ‘unlikelys’ in all of that, qualifying words that mean that there might be an impairment coming in Q4 2020, and if there is it would amount to some “significant” part of the $25 to $30 billion value, not the entire thing. Because at its essence, an impairment is largely a mark-to-market reassessment designed to reflect the fact that the long-term market conditions and price outlook for those particular assets have fundamentally shifted.

But those qualifying words included by the company in that advisory obviously did not have their intended effect. The Guardian ran a story following Exxon’s disclosure whose headline read “ExxonMobil warns of $30bn writedown of shale assets amid energy price slump”, leaving out the part about the possible impairment amounting to some undefined portion of that number, not the entire thing, and making no reference to the further advice that the assets could be subject to no downward adjustment at all if the company decides to keep them in its long-term development plan.

Are natural gas prices lower now than they were when ExxonMobil executed its acquisition of XTO Energy a decade ago? Certainly. Are they zero? No, and in fact over the past two months the NYMEX index price has risen about 80% in anticipation of improving market conditions, frequent hurricane-related production curtailments in the Gulf of Mexico, and the prospect of a cold winter at long last.

CNBC analyst Jim Cramer – who believes that ExxonMobil overpaid for XTO back in 2009 – meanwhile, said on his TV program that the disclosure means that the company is “in preservation mode.” But is that really what’s happening here?

Certainly, Exxon has, like most other companies in the oil and gas business, been hard hit by the COVID-19 pandemic and its impacts on global demand. That has resulted in the company reporting financial losses in three consecutive quarters for the first time in its history and, as everyone knows, its removal from the list of companies that make up the Dow Jones Industrials.

But is that disclosure included in its Q3 financials really indicative of a company in “preservation mode?” Or is it indicative of a company in the process of reassessing and potentially high-grading its asset portfolio in order to become more competitive in the new set of market conditions with which it has been presented? A company engaged in a strategic re-set of the kind every management team engages in at key points in time.

Again, the industry is in tough times, but those times and market conditions are also rapidly evolving. Part of the media/analyst frustration with ExxonMobil is the perception that it has somehow been “slow” to take the same kinds of major impairments incurred by many of its peer companies during the course of this year. That’s somewhat understandable, but again, so much of this has to do with the making of judgment calls about what the future will look like, and management teams from company to company have a very diverse and conflicting set of views on such judgments.

Exxon’s outlook on what the future for fossil fuels will look like is in some ways fundamentally at odds with the views of, say, BP or Shell, and there is nothing wrong with that. It should be noted that, although it has received precious little media notice, demand for crude oil by the world’s largest energy consumer, China, has already recovered to a higher level than its pre-COVID consumption, and the same is true in India, the world’s most rapidly expanding economy.

The point here is not to say Exxon is right and other companies are wrong in their outlooks and judgment calls; it is to point out the fact that the regulations governing these asset impairments leave room for such diversity of thought in the industry, and that is likely a good thing for all concerned. We would have less confusion if everyone in the energy-focused media and investor/analyst community would deal with that reality and avoid trying to make these complex judgment calls for ExxonMobil or any other company.

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