(Bloomberg) – The Securities and Exchange Commission has been largely silent over the past few years on the financial wreckage of the U.S. shale industry, but that may soon change.
The top US financial regulator’s reported investigation into how Exxon Mobil Corp values shale assets follows years of concerns about the rosy forecasts in the industry, which left hundreds of billions of dollars in investor losses and write-offs.
Exxon, the West’s largest oil company, is accused in a whistleblower of inflating the value of a major asset in the Perm basin and making too optimistic drilling plans, the Wall Street Journal reported on Friday. The company denied the claims, while Exxon’s share fell to 6%.
“The SEC is combating the overvaluation of these kinds of valuable assets,” said Arthur Jakoby, a former SEC official and now a partner at Herrick, Feinstein LLP in New York, who is not involved in the case. “It’s a very easy way to inflate the price of one share, especially oil and gas companies using estimates for what they have in the ground.”
The shale revolution has increased global energy markets over the past decade, making the US the world’s largest oil and gas producer and providing oceans with cheap crude oil to consumers. However, the jump in production was built on shaky financial foundations. Funded by cheap money and spurred on by sky-high prices that are delivering shale assets at the height of the boom, industry executives have told investors that fracking will make U.S. oil fields comparable to those in the Middle East.
Oil companies such as Exxon, ConocoPhillips and BP Plc have made multi-million dollar acquisitions and turned wildcats into overnight billionaires. Fracking pioneers like Chesapeake Energy Corp. entered into large, many leverage transactions of their own. But even as technology advanced and production skyrocketed, companies continued to burn cash. According to Deloitte LLP, the industry wrote off $ 450 billion in investment capital and saw more than 190 bankruptcies between 2010 and 2020.
Many investors point to the gap in what shale businesses say they can drill profitably and what they ultimately do. Exxon bought a large position in the Permian in 2017 and rapidly increased production targets, culminating in a pre-pandemic plan to reach 1 million barrels of oil per day by 2024. Permian assets because drilling times were longer than expected in 2018, reports the Journal.
The claims are “demonstrably false”, Exxon said in a statement without confirming or denying that an investigation is underway. “The actual and provable performance exceeded the drilling plans for the Perm and such achievements are accurately represented in the investment community.” The SEC declined to comment.
The reported complaint from whistleblowers still reflects what investors – and some engineers – have been saying for some time about the projections of smaller shale businesses. Many investors now focus almost exclusively on free cash flow, which is more difficult to manipulate.
“It’s all been boiling under the surface since 2012,” said Ed Hirs, a longtime energy fellow at the University of Houston. “But the challenge here is that the investment community has only looked at the cash flow over the past few years.”
Nowhere is more controversy than in the Permian, now the largest American oil field. The excitement reached a fever level after the oil price crash of 2014-2016, when private equity quickly wanted to get a share of the action, which he said would be a lucrative entry point. Recently, many of the players had to be forced to record large impairments.
Concho Resources Inc., which Conoco agreed to buy in October, demanded $ 12.6 billion for its oil and gas assets earlier last year, one in a long list of major write-offs that followed. a collapse of the coronavirus in crude prices. The move came two years after the company bought RSP Permian at a price that values the oil and gas assets much higher than the transactions involving neighboring producers.
Apache Corp. also wrote down the value of his flagship Alpine High project, long hailed as a productive find in an ignored part of the Permian, which ended up being much richer in gas than oil.
At the start of the boom, when Aubrey McClendon turned Chesapeake into a shale gas giant, the regulator changed its rules on how companies could calculate oil and gas reserves.
Many blame the relaxed regulatory environment on how complicated the calculation of future production can be. It is, after all, an estimate based on assumptions such as drilling times, how close wells are broken and the cost of renting land. As some engineers have said, reservoir engineering is more art than science.
“This is not a simple investigation, because assets can be valued in different ways,” Jakoby said. “The SEC will look for a smoking gun that shows management is pursuing a deal.”
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