By Karen Savage
Had Exxon included greenhouse gas costs when assessing the value of its assets in the Mobile Bay gas field, it would have incurred an impairment loss of between $320 and $478 million, according to testimony heard Thursday in the second week of Exxon’s trial for climate fraud.
An impaired asset is one that has a market price less than the value listed on the company’s balance sheet and must be recognized as a loss. In the case of Exxon’s valuation of its reserves in Mobile Bay, financial reporting expert Eli Bartov testified that did not happen.
Bartov, professor of accounting at NYU’s Stern School of Business, testified for the New York attorney general’s office, which alleges Exxon deceived investors by failing to disclose it used two different sets of numbers to assess climate risk, one it disclosed to shareholders and another used for its own internal calculations. As a result, Exxon shareholders suffered losses totaling between $476 million to $1.6 billion, according to the AG’s office.
Bartov described how to test for impairment: Step one is to consider whether certain indicators are present, such as a significant decrease in the market price of a long-lived asset or other significant change in circumstances. If so, step two tests the recoverability of the asset. Step three is to measure the impairment of the asset, he said.
Under the direction of Jonathan Zweig, an attorney for the AG, Bartov testified that values used in an impairment analysis must be consistent with Exxon’s other internal projections, as well as with financial statements and other public disclosures.
Bartov was tasked by the AG with assessing whether Exxon inappropriately omitted the greenhouse gas cost from its 2015 impairment testing and if so, to evaluate potential financial losses. He was also asked to assess the impact of Exxon’s alleged misrepresentations on its management of climate risks on the company’s stock price.
Bartov approached his time on the witness stand like a professor before a packed lecture hall, peppering his testimony with humor. He patiently, often repeatedly and extensively, detailed complex and otherwise mundane concepts.
His replies often included far more information than either set of attorneys sought.
After one particularly long-winded answer, he paused and attempted to ask a question, prompting a deadpan response from Judge Barry Ostrager.
“That’s not how it works here. We ask the questions and then you respond,” Ostrager said.
Bartov testified that he used documents gathered by the AG’s office to ensure he used the same values and accounting methods used by Exxon.
“There’s no guessing here, no assumptions here, its straight from documents prepared by Exxon,” Bartov said. “All of these numbers cannot be disputed because they have been provided by Exxon.”
“Exxon inappropriately excluded the greenhouse gas costs on the cost projections related to 2015 impairment testing,” Bartov said when asked by Zweig for a summary of his findings on the impairment analysis.
Exxon did use greenhouse gas costs in its 2016 and 2017 impairment testing, Bartov said.
“Had they used the same analysis from 2016 and 2017 in 2015, then they would have concluded in 2015 the asset was impaired and they would have recorded the impairment loss,” Bartov testified.
“They postponed the loss from 2015 to 2017.”
Exxon attorney Justin Anderson came out swinging during his cross examination, immediately questioning Bartov’s methods, why he evaluated the Mobile Bay asset and the definition of a “mature asset.”
Eventually, Anderson settled in on his main focus: whether Bartov followed the three steps required for a proper impairment analysis and his contention that Exxon found no triggering events in step one of the 2015 analysis and therefore did not go further.
“Based on information given to me by Exxon employees, I can see they combined step one and step two of the analysis—to me as an expert, I can tell you the cash flow analysis presented to me cannot be step one, it must be step two,” Bartov said, referring to a specific assessment normally conducted in step two of the analysis.
“If you want to call step two step one—which I think is absurd—then you can. I’m not playing games with semantics,” Bartov said, adding that the analysis conducted by Exxon employees includes a value referred to as a “headroom,” which is the result of calculations performed in what is generally considered step two.
When the calculation was performed wasn’t an issue—guidelines provide the discretion to perform it in step one—but rather the issue is that the calculation must follow specific guidelines whenever it is performed, something Exxon failed to do, Bartov testified.
“You don’t have to take my word for it, look at the work of [PricewaterhouseCoopers],” Bartov said, referring to Exxon’s auditor.
Anderson then showed the court a PricewaterhouseCoopers document regarding its review of Exxon’s 2015 impairment analysis for Mobile Bay.
“We do not take exception to management’s assertion that there was no impairment triggering event for the Mobile Bay asset,” a PricewaterhouseCoopers analyst wrote.
“How do you know how [PricewaterhouseCoopers] would have reacted if ExxonMobil had not done corrupt analysis and found negative headroom,” Bartov said, appearing unfazed.
Ostrager seemed both enthralled and exasperated by Bartov. At one point he admonished Anderson to stop talking over him.
“Let him answer the question, as rambling as it might be,” Ostrager said.
Bartov also testified that as a result of Exxon’s alleged misrepresentations, its stock prices between April 2014 and January 2016 were inflated by $1.64 per share when using estimates that are correct at least 95 percent of the time. In all, that translates to a total dollar value of at least $6.9 billion.
In order to prove fraud under the Martin Act, the AG must establish that potentially deceptive information provided by Exxon was false and that investors would have considered that misinformation to be important to their investment decision.
Once the AG finishes calling its witnesses, Exxon will then have until Nov. 12 to present its defense. Ostrager has said he intends to render a decision no more than 30 days after the trial ends.