Exxon Issues Warning on Reserves After Posting Drop in Profit

On Friday, Exxon Mobil Corp issued a warning that it could be forced to end close to 20% of its future gas and oil prospects as it yields to the steep decline in energy prices around the world.

Under an investigation by New York state and the United States Securities and Exchange Commission over accounting practices as well as the impact of future regulations for climate change on its business, Exxon disclosed that close to 4.6 billion barrels of crude in its own reserves, for the most part in Canada, might be too expensive to drill.

Exxon faces both near- and long-terms issues as it looks to exploit the complete value of its vast gas and oil portfolio that runs from Texas into the Caspian Seas, along with delivering the high dividends that shareholders have become accustomed to since it was Standard Oil.

Today the business suffers amidst a plunge of two-years in the prices of oil with a barrel currently trading at $50. CEO Rex Tillerson said he believes the $50 rate for a barrel of crude could linger due to shale producers in the U.S. ramping up production as soon as the price makes a move upward, prolonging the current crude glut and putting a strong ceiling on any upswing in price.

Earlier in 2016, Exxon lost the rating of triple-A bond that it held from S&P’s Rating Services for 86 yards, a creditworthiness standing that was shared by only two other companies Johnson & Johnson and Microsoft Corp. In 2015, Exxon did not find sufficient new gas and oil to replace the amount it produced for only the first time in 17 years.

Exxon is by itself amongst major oil businesses in that it has not written down its future wells value as prices dropped. It announced that it follows practices that are conservative when booking reserves.

It is now planning to examine assets to test, under rules that follow accounting standards, whether they are worth any less than what it is carrying them for on the books.

Exxon said the reserves reductions of 20%, which are separately governed by rules in the SEC, might be necessary due to the average price in 2016 by the end of this year, though higher November as well as December prices could mitigate the amount of that decline.

On Friday, during an investor call, Exxon would not discuss any potential write off in reserves or write downs in accounting in detail expect of the statement released.