As expected, COVID wrought havoc with earnings, leaving ExxonMobil with an enterprise-wide return on capital employed of minus 9.5%. But the real story wasn’t in the income statement; it was the estimate of oil reserves. At the end of 2019, ExxonMobil claimed 22.4 billion barrels of oil reserves worldwide. Now, it claims just 15.2 billion barrels—a drop of more than 7 billion barrels, including 3 billion barrels in Canada and more than 1 billion in the U.S.
Much of this decline was actually a “re-de-booking.” The company first struck its Canadian oil sands barrels from its ledgers in 2017, under scrutiny by the U.S. Securities and Exchange Commission after the company’s peers had renounced their oil sands reserves in 2015 and 2016. Two years later, ExxonMobil reversed itself, reclaiming the oil sands as viable reserves. Now, once again, the company admits its oil sands assets fail the financial tests needed to count as reserves.
This pattern of de-booking and re-booking tells us that the oil sands reserves are economically marginal at best. When taken against ExxonMobil’s broader financial backdrop—including a $10 billion year-over-year cut in capital expenditures and a $60 billion increase in debt—it now seems unlikely that these oil and gas assets will be developed within any reasonable time frame. The implication is striking: ExxonMobil now appears to be 30% smaller than company leaders had told investors.
That’s not the end of the bad news about the state of ExxonMobil’s assets. The recent sale of its North Sea oil assets for a disappointing $1 billion hints that the company will not only be unable to develop its oil sands reserves, it may not even be able to sell them. The de-booking may even add to the company’s legal woes. In 2017, investors filed a lawsuit alleging that aspects of ExxonMobil’s oil sands reserve calculations were fraudulent. The suit has survived several motions to dismiss—and this recent re-de-booking could strengthen those claims.
As oil prices rise from last year’s depths, we can expect ExxonMobil’s financial performance to improve over the short term—and management will no doubt claim that the company is back on course. But investors should remain skeptical. Before the pandemic, it was clear that the executive suite had made a decade of bad investments. The same culture that steered the company into those failures is still at the helm. With some additional cash at its disposal, investors should be worried—not relieved.
This year, ExxonMobil faces pressure at the board level to address a “to-do” list: Reverse value destruction, improve investment quality, cut debt, find better board members, and strengthen environmental stewardship. It would help to add the adoption of a uniform accounting system that meets basic tests of transparency and gains the respect of the investment community.
The company leadership has long delayed such moves, scoffing at the idea of setting corporate direction based on the twists and turns of oil prices. But ExxonMobil’s gyrating reserves estimates reveal that the company is now doing just that—and has become rudderless.
Tom Sanzillo ([email protected]) is IEEFA’s director of financial analysis.
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