Exxon SEC probe highlights concerns over swollen shale reserves



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(Bloomberg) – The Securities and Exchange Commission has been largely silent on the financial disaster of the U.S. shale industry in recent years, but that may be about to change.

The investigation reported by the main US financial regulator into how Exxon Mobil Corp. valuation of shale assets follows years of concerns over optimistic industry projections, which have left hundreds of billions of dollars in losses and write-downs for investors.

Exxon, the West’s largest oil company, is accused in a whistleblower complaint of inflating the value of a key asset in the Permian Basin and of making overly optimistic drilling plans, Wall Street reported on Friday. Newspaper. The company has denied the allegations, while Exxon shares fell 6%.

“The SEC is cracking down on overvaluing these kinds of hard-to-value assets,” said Arthur Jakoby, former SEC official and now partner at Herrick, Feinstein LLP in New York, and who is not involved in the case. “It’s a very simple way to increase the price of a stock, especially oil and gas companies using estimates of what they have in the ground.”

The shale revolution has shaken up global energy markets over the past decade, making the United States the world’s largest producer of oil and gas and providing oceans of cheap crude to consumers. However, the ramp-up of production was based on fragile financial bases. Funded by cheap money and boosted by the sky-high prices shale assets were fetching during the height of the boom, industry executives argued to investors that fracking would make America’s oil fields comparable to those in the Middle -East.

Oil giants like Exxon, ConocoPhillips and BP Plc have made multi-billion dollar shale acquisitions, turning ferocious into billionaires overnight. Fracking pioneers such as Chesapeake Energy Corp. have entered into significant leveraged transactions themselves. But even as technology advanced and production skyrocketed, these companies continued to burn money. The industry reduced $ 450 billion in invested capital and saw more than 190 bankruptcies between 2010 and 2020, according to Deloitte LLP.

Many investors point to the gap between what shale companies say they can profitably drill and what they ultimately do. Exxon bought a significant position in the Permian in 2017 and quickly increased production targets, culminating in a pre-pandemic plan to reach 1 million barrels of oil per day by 2024. The whistleblower complaint says some employees Exxon pushed for a lower valuation for some Permian Assets because drilling times were longer than expected in 2018, the Journal reported.

The allegations are “patently false,” Exxon said in a statement, without confirming or denying that an investigation is underway. “Actual and provable performance exceeded drilling plans for the Permian and this performance was accurately represented to the investment community.” The SEC declined to comment.

Still, the whistleblower complaint echoes what investors – and some engineers – have been saying for some time about small-company shale projections. Many investors are now focusing almost exclusively on free cash flow, a number that is more difficult to manipulate.

“Everything has been boiling below the surface since 2012,” said Ed Hirs, longtime energy scholar at the University of Houston. “But the challenge here is really that for several years the investment community has only looked at cash flow.”

Nowhere is shale more popular than in the Permian, now America’s largest oilfield. The excitement peaked after the 2014-16 oil price drop, when private equity rushed to get a share of the stock, securing what it believed to be a profitable entry point. . Recently, many of these players have been forced to suffer massive disabilities.

Concho Resources Inc., which Conoco agreed to buy in October, took a $ 12.6 billion charge for its oil and gas assets earlier last year, one among a long list of huge write-downs which followed a crash in crude oil prices caused by the coronavirus. The move came two years after the company bought RSP Permian at a price that valued its oil and gas assets much higher than deals involving neighboring producers.

Apache Corp. also noted the value of its flagship Alpine High project, long touted as a prolific find in an overlooked part of the Permian, which ended up being much richer in gas than oil.

At the start of the boom, as Aubrey McClendon turned Chesapeake into a shale gas giant, the regulator changed its rules on how companies could calculate oil and gas reserves.

Many attribute the complexity of calculating future production to the relaxed regulatory environment. This is, after all, an estimate based on assumptions such as drilling times, distance between wells and the cost of renting land. As some engineers have said, reservoir engineering is more of an art than a science.

“It’s not a simple survey because assets can be valued in different ways,” Jakoby said. “The SEC will be looking for a smoking gun that shows management has pushed for overvaluation.”

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