By Stephen Cunningham and Rachel Adams-Heard on 1/15/2021
(Bloomberg) –Exxon Mobil shares dropped more than 5% after a newspaper report said the company is being investigated by the U.S. Securities and Exchange Commission for allegedly overvaluing a key asset in the Permian Basin.
The probe stems from a whistleblower complaint that during a 2019 internal assessment, workers were forced to use unrealistic assumptions about how quickly wells could be drilled to reach a higher valuation, the Wall Street Journal reported, citing people familiar with the matter. At least one of the workers who complained was fired in 2020, the Journal said.
Exxon Mobil CEO Darren Woods
The probe may cast a shadow over Exxon’s efforts to turn a corner after its shares posted their worst annual performance in 40 years in 2020 amid a collapse in oil prices. CEO Darren Woods has been forced to slash spending, and last month the company said it will write down the value of North and South American natural gas fields by as much as $20 billion.
Exxon fell 5.3% to $47.62 at 10:08 a.m. in New York, ending a nine-day rally. The SEC declined to comment. Exxon didn’t immediately respond to a request for comment.
It’s not the first time Exxon has been probed by the SEC over how it values assets. In 2016, Exxon was questioned by the regulator about why the company appeared immune from the multi-billion write downs affecting the rest of the industry. The issue was resolved without any action being taken.
The SEC requires oil companies to report with reasonable certainty the volume of reserves in wells that are profitable at a price set by the agency the year before. Those wells must be drilled within five years of being added to a company’s books. The calculations take into account the rate at which a well’s production is likely to decline, how closely the wells are drilled, land and capital costs, as well as the price per barrel of crude.
The SEC adopted new reporting rules in 2009, lobbied by Chesapeake Energy Corp. and others who said the old ones weren’t fit for the coming shale boom. Before the rule change, there was a series of reserve scandals that involved Royal Dutch Shell Plc, which the agency fined $120 million in 2004, leading to the exit of top executives, and a few years later El Paso Corp., which settled charges for inflating reserves. Both companies settled without admitting or denying wrongdoing.
UPDATE: On Friday, January 15th, Exxon Mobil issued the following statement regarding an SEC investigation:
“The claims made by an alleged whistleblower, and reported by The Wall Street Journal, are demonstrably false. Actual and provable performance exceeded drilling plans for the Permian, and such performance has been accurately represented to the investment community. The Wall Street Journal has been aware of these facts since September.
The company stands by its statements to investors, and, if the company were to be asked about this matter by authorities, it would provide information that shows the accuracy of its valuation of the company’s Permian assets, and that actual drilling performance exceeded the plans.
ExxonMobil has an extensive and rigorous planning and budgeting process that considers many sensitivities and ranges of outcomes. It takes into account thousands of inputs including hundreds of drilling curves over a seven-month period. Learning curves were developed as a collaborative effort between the drilling team executing the work, who had the most expertise with current drilling performance, and the development team, who leveraged data from demonstrated learning curve performance in other unconventional projects. There were multiple learning curves considered and evaluated throughout the process.
It is obvious that the employees who are alleged to have made the false claims lack the breadth and depth of experience to understand how and why drilling curves are routinely revised as technologies improve and understanding of the resource base expands. Historically, the company’s unconventional drilling performance has increased in short timeframes as engineers and planners gather more data in basins across its portfolio.”
Appeared on www.worldoil.com