Failed Acquisition From 2009 Result S In $20 Billion Hit For Exxon

ExxonMobil has announced a dramatic mark down in the value of its natural gas assets, hitting the company already embattled throughout 2020. And with the company forecasting a more muted oil price recovery, the company also pledge to sharply reduce its spending ambitions.

Incurring a non-cash charge of between $17 billion and $20 billion is being planned by Exxon which is huge amount for a company that has historically been opposed to writedown values of assets.

This writedown is predicted to be the largest one I n the company’s history. 

This move by the company also reflects the extent of the error Exxon made when acquiring the natural gas giant XTO Energy in late 2009 for a deal value of $41 billion. The company now will have to writedown about half of that amount.

The global market for natural gas is current severely depressed with a price of about $3 per million British thermal units which is less than half the price of natural gas when Exxon had made the acquisition. The price of natural gas reached its peak in late 2005 with prices at more than $15 per million BTU.

But a boom in shale gas production particularly in the United States has caused a glut in the natural gas market.

Exxon’s “colossal gas asset impairment” is management’s “clearest acknowledgement to date that the XTO deal was an epic failure — not that any reminders of this are needed,” Raymond James analyst Pavel Molchanov wrote in a note to clients.

Properties in Appalachia, the Rockies, Texas, Oklahoma, Louisiana and Arkansas – acquired as a part of the XTO deal, are included in the bulk of the writedown by Exxon. Overseas gas properties in western Canada and Argentina makes up the rest of the charge.

Exxon is not the only global oil company that has been forced to write down the value of its fossil fuel assets. Similar massive writedowns have been taken by Chevron, BP and Shell over the past year.

Some of these gas properties have been completely removed from its development plan by Exxon in addition to slashing the value of its natural gas portfolio.

It may sell some of these assets, “contingent on buyer valuations”, Exxon said in a statement. Rather than making more investments in natural gas, Exxon has pledged its investors that it will “prioritize near-term capital spending on advantaged assets with the highest potential future value.”

Development of its large oil resources in Guyana, speeding up oil production in the Permian Basin of West Texas and investing in some new exploration in Brazil will be its specific focus, Exxon said.

Its ambitious plans of increasing investments despite the low oil prices are being scaled back by Exxon. For 2021, $19 billion or less is now expected to be spent by the company while for the period till 2025, it plans to invest between $20 billion and $25 billion a year. in comparison in March, the company had announced plans of investing $30 billion to $35 billion a year through 2025.

(Adapted from CNN.com)

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