Exxon Mobil Corporation (XOM), Chevron Corporation (CVX): What’s Hiding in Big Oil’s Balance Sheet?

A ratio for this, a metric for that. All told, there are hundreds of ways of multiplying or dividing a couple numbers from a company’s financial statements. These metrics are handy ways to make comparisons between companies, but these numbers can also miss some critical elements about a company’s prospects. To further explore this idea, let’s take a look at some things that may be overlooked by taking a deeper dive into the balance sheets of big oil.

The rest of the story
Just like how many individuals fear personal debt, investors have a high aversion to debt on a company’s balance sheet. If you’re an investor, that money going to pay interest on senior notes would look a lot better in your pocket. One way we like to measure debt is with the debt-to-capital ratio. It gives us a quick and dirty way to monitor the credit health of our investments, but this metric is far from perfect.

Using the personal finance comparison again, it’s likely that an individual has short-term debt like a credit card and long-term debt like a mortgage or student loans, but those loans probably don’t cover all your contractual obligations. The same can be said for companies. Their total debt and debt-to-capital ratios don’t include other contractual obligations such as pension liabilities and asset retirement obligations. Just look at the example of big oil:

Sources: S&P Capital IQ, author’s calculations.

On the surface, a company like Exxon Mobil Corporation (NYSE:XOM) looks to have a clean balance sheet with a low debt level, considering the large amount of assets on the books. Looking further, though, we see that adding obligations for pensions and asset retirement more than triples the amount of money that needs to go out the door before investors get a cut. This is true pretty much across the board. The reported debt-to-capital ratio doesn’t exactly tell the whole story of what’s going on for that section of the balance sheet. The only company that doesn’t double its obligations by adding in these other items is Total.

One important thing to consider, though, is that asset retirement obligations are an estimate of what it will cost for a company to retire that asset from use. So the real obligation can vary based on what a company pays to get that asset off the books. Also, as you can imagine, BP plc (ADR) (NYSE:BP)’s obligations are much higher compared with the others in part because the company still has some contingencies set aside for any additional obligations for the Deepwater Horizon spill. These may or may not be enacted based on any costs the company may incur once the trust it set up runs dry.

Hidden gems
Of course, items hiding on a balance sheet don’t need to be bad things. Sometimes they can be added benefits that don’t show up in the traditional revenue. Of the majors, there are two items that stand out the most. Within Total’s annual findings, you’ll find that the company owns 66% of shares outstanding in solar panel manufacturer SunPower Corporation (NASDAQ:SPWR). Currently, SunPower doesn’t offer a dividend, so Total doesn’t earn a realized gain on the shares. However, for each dollar increase over the purchased share price of $23.25 for SunPower, Total has an unrealized net income benefit of $72 million.