Summary
- Write-offs generally mean an industry bottom is near.
- Impairments need to be verified by future management actions.
- Cash flow is the big deal and this company shows signs of abundant cash flow in the future.
- There is no need to follow the Chevron example of impairments followed by a quick sale.
- If Exxon Mobil does sell the impaired properties, then that sale will take place after the recovery has begun.
- This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Get started today »
For much of the last year there were various headlines about Exxon Mobil (XOM) doing a natural gas write-off. One would have thought that this would be the end of the company from the dire headlines. Management did note that dry gas was not in the future capital projects for the time being and therefore management has written down the dry gas assets. But that announcement came as the industry was beginning a cyclical recovery. Therefore, the market just shrugged off the news.
More importantly, write-offs represent a management calculation of the expected valuation of the assets going forward based upon (wait for it) management expectations. In a cyclical industry, that conservative assumption often made at market bottoms could prove to be far too conservative. These assets could indeed live up to their potential during the next cycle or they could be sold off at a loss. But until management actually takes a loss on these assets and note a write-off, the potential earnings power of the assets is still up for debate.
As an example, Chevron (CVX) wrote down about $10 billion or so recently. Chevron then monetized or confirmed that re-evaluation when it sold some properties to EQT (EQT) for $735 million. The sale occurred at a market bottom and eliminated any possible recovery in value for shareholders. Selling at the bottom of a cyclical market means that the recovery value was at a minimum or near a minimal amount. That monetization process may have maximized the possible actual loss from this series of management decisions.
There is every chance that the coming natural gas recovery would have offered a chance to sell these assets for a better price that would have more than offset any costs of holding the asset. Chevron has a strong balance sheet and an excellent financial rating. Therefore, the decision to sell these natural gas properties may be questioned by some.
Exxon Mobil has announced the write-off. But the timing of any possible sales is different as the recovery of commodity prices has begun. This should eventually lead to a better (more liquid) market to sell natural gas properties if management should desire to sell them.
