ExxonMobil announced a $19.3 billion write-down on Tuesday, a big hit to a company reeling from depressed oil and gas prices and a rapidly changing global energy market.
The write-down reduces the value of the assets on Exxon’s books. The announcement comes as part of the company’s fourth quarter earnings for 2020.
The fossil fuel giant, however, may be understating the financial damage to its assets, according to a former ExxonMobil employee turned whistleblower, Franklin Bennett. The oil major has overvalued its assets for years, according to Bennett and a team of advisors, a practice he describes as “fraudulent and defiant behavior” in a January 31 supplement to a whistleblower complaint he filed with the U.S. Securities and Exchange Commission (SEC).
Bennett and his team argue that instead, the company has been overvaluing its U.S. oil and gas assets by as much as $56 billion, as of year-end 2019.
At the root of the SEC complaint is ExxonMobil’s 2010 purchase of shale fracking company XTO Energy, which it acquired at the height of the natural gas boom for $46 billion. In the months and years following the acquisition, natural gas prices collapsed, and never returned to previous heights, rendering much of XTO’s assets uneconomic to produce.
Until now, ExxonMobil largely refused to take a meaningful write-down on those assets, despite several downturns in oil and gas market conditions. In particular, a deep natural gas price slide in 2015–2016, and another in 2019, hollowed out the valuation of many high-cost shale gas assets. Through it all, Exxon never took a significant write-down, which Bennett and his team argue is illegal.
In accounting terms, Exxon essentially told regulators that they could still get full value from the assets that they paid for in 2010, despite the deterioration in the natural gas market, claims the SEC complaint.
Bennett, a former senior accounting analyst for ExxonMobil who spent seven years at the company between 1988 and 1995, alleges that this refusal to write down assets amounts to securities fraud because Exxon misled investors into thinking its assets were worth more than they really were. He and a team of advisors filed a whistleblower complaint in 2015 to the SEC, and have added new evidence to the docket in the intervening years.
Screenshot of the SEC complaint supplement filed on January 31, 2021.
In the latest supplement filed on January 31 and shared with DeSmog, Bennett and his advisors say that Exxon has overvalued its assets by as much as $56 billion, as of 2019. ExxonMobil’s write-down of $19.3 billion is “too little, too late,” Bennett and his team say.
In the filing, Bennett and his team claim that Exxon inappropriately grouped good assets with bad ones to obscure the damage, “hiding problem assets behind historical winners.” The filing also alleges that Exxon’s accounting policies “don’t recognize current and relevant economic trends,” allowing it to “gloss over problems.”
Exxon ignored the multiple slumps in natural gas prices over the past decade by not taking a write-down years ago, the filing argues. By the same token, the New York Mercantile Exchange (NYMEX) futures market suggests that natural gas prices won’t reliably stay above $3 per million British thermal units (MMBtu) at any point over the next decade, a price too low for the XTO assets to economically make sense. Again, as Bennett argues, this has been clear for quite some time.
“This is just a continuation of at least six years of fraudulent and defiant behavior by Exxon, which has slanted its accounting policies and skewed its impairment calculations to avoid necessary write downs of its oil & gas properties since at least 2014,” the filing says.
ExxonMobil did not return a request for comment.
Exxon’s massive write-down is overdue by several years, according to Bennett. For example, the assets related to the disastrous XTO acquisition “have been sitting stagnant on Exxon’s balance sheet since at least 2014,” the complaint says, referring to a more pronounced market slump that began that year.
The whistleblower complaint cites the fact that Exxon only spent an average of $180 million per year between 2015 and 2019 on its U.S. exploration budget, or less than 1 percent of the cost of its “unproved” properties, which Bennett and his team say is evidence that Exxon already knew that these reserves were not worth developing, even as they were nonetheless counted as valuable assets on the books.
“At that miniscule rate of exploration spending, Exxon would never complete the vast majority of its U.S. unproved properties,” the complaint states (emphasis in original). “From a return-on-investment standpoint, the company shouldn’t complete those projects — they’re economic losers!”
Bennett and his advisors argue that Exxon’s exploration unit “apparently can react logically” in the face of poor economics, but its accounting department “seems incapable of such logic when considering write downs of hopelessly over-valued oil & gas properties.”
Screenshot of the SEC complaint supplement filed on January 31, 2021.
The particular timing of the write-down also raises questions about the company’s motives. The problematic economics of U.S. shale drilling is not new and there was nothing notable that happened in the fourth quarter of 2020 to trigger a write-down. For instance, average natural gas prices in late 2019 were actually lower than in late 2020. By contrast, many of Exxon’s peers took huge write-downs in late 2019 and in the first and second quarters of 2020, during the depths of the most recent downturn.
Bennett and his team argue that Exxon is using the pandemic as cover for its past accounting practices. Taking an impairment, or write-down, for the fourth quarter of 2020, as Exxon is doing, while citing the pandemic-induced market downturn, is a “false excuse,” Bennet says.
It is “way too late for Exxon to catch up with generally accepted accounting standards by booking oil & gas property write downs in the fourth quarter of 2020,” the complaint concludes. Bennett adds that taking a write-down now does not correct for likely past instances of securities fraud.
This is not the first time that Exxon’s accounting practices have received scrutiny. In 2015, then Exxon CEO Rex Tillerson told Energy Intelligence: “We don’t do write-downs,” arguing that conservative accounting practices allowed the company to avoid having to write down assets during market downturns.
Even as Exxon’s peers logged multi-billion-dollar write-downs after a particularly brutal slide in prices between 2014 and 2016, Exxon dug in its heels. That refusal to write-down assets attracted the attention of the New York attorney general, who was already investigating the company for securities fraud related to its past knowledge of climate change.
In a separate but related issue, the SEC launched an investigation last year into Exxon’s accounting practices related to its assets in the Permian. According to the Wall Street Journal, another whistleblower alleges that in 2019 ExxonMobil pressured employees into using unrealistic assumptions about its potential production growth in the Permian basin. The complaint says that the employees were pressured to use optimistic assumptions about the pace of drilling, which would lead to a larger value of the asset.
The company stated that it could grow its production to 1 million barrels per day in the Permian by 2024. “No one I knew in the organization thought this was possible; the pressure to deliver on Woods’s promise to the market permeated the organization,” the whistleblower said in that complaint, as reported by the WSJ, referring to ExxonMobil CEO Darren Woods.
Bennett told DeSmog that the SEC has not yet acted on the information that he has provided in his complaint, despite a steady stream of submissions. He and his team are more hopeful to see some movement under the Biden administration with new leadership at the SEC and the Department of Justice.
The SEC declined to comment.
Update 03/03/2021: In a new supplemental filing with the U.S. Securities and Exchange Commission submitted on March 3, Franklin Bennett and his team of advisors calculate that ExxonMobil was still overvaluing its assets by roughly $41 billion as of the end of 2020. This updated figure takes into account the $19.4 billion write-down loss that ExxonMobil took in the fourth quarter of 2020.
“[O]ur whistleblower project pursues a financial fraud which has cheated millions of people. These people invested in a corporation which tells people that the corporation has valuable assets. Our Team has now calculated that $41 Billion of those assets are worthless and uneconomic,” the new filing states.