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Analysis of Property, Plant and Equipment

Difficulty: Advanced


Property, Plant and Equipment Accounting Policy

Cost Basis

ExxonMobil uses the "successful efforts" method to account for its exploration and production activities. Under this method, costs are accumulated on a field-by-field basis. Costs incurred to purchase, lease, or otherwise acquire a property (whether unproved or proved) are capitalized when incurred. Exploratory well costs are carried as an asset when the well has found a sufficient quantity of reserves to justify its completion as a producing well and where ExxonMobil is making sufficient progress assessing the reserves and the economic and operating viability of the project. Exploratory well costs not meeting these criteria are charged to expense. Other exploratory expenditures, including geophysical costs and annual lease rentals, are expensed as incurred. Development costs, including costs of productive wells and development dry holes, are capitalized.

Depreciation, Depletion and Amortization

Depreciation, depletion and amortization are primarily determined under either the unit-of-production method or the straight-line method, which is based on estimated asset service life taking obsolescence into consideration.

Acquisition costs of proved properties are amortized using a unit-of-production method, computed on the basis of total proved oil and gas reserves. Capitalized exploratory drilling and development costs associated with productive depletable extractive properties are amortized using the unit-of-production rates based on the amount of proved developed reserves of oil and gas that are estimated to be recoverable from existing facilities using current operating methods. Under the unit-of-production method, oil and gas volumes are considered produced once they have been measured through meters at custody transfer or sales transaction points at the outlet valve on the lease or field storage tank. In the event that the unit-of-production method does not result in an equitable allocation of cost over the economic life of an upstream asset, an alternative method is used. The straight-line method is used in limited situations where the expected life of the asset does not reasonably correlate with that of the underlying reserves. For example, certain assets used in the production of oil and natural gas have a shorter life than the reserves, and as such, ExxonMobil uses straight-line depreciation to ensure the asset is fully depreciated by the end of its useful life.

To the extent that proved reserves for a property are substantially de-booked and that property continues to produce such that the resulting depreciation charge does not result in an equitable allocation of cost over the expected life, assets will be depreciated using a unit-of-production method based on reserves determined at the most recent SEC price which results in a more meaningful quantity of proved reserves, appropriately adjusted for production and technical changes.

Investments in refinery, chemical process, and lubes basestock manufacturing equipment are generally depreciated on a straight‑line basis over a 25-year life. Service station buildings and fixed improvements generally are depreciated over a 20-year life. Maintenance and repairs, including planned major maintenance, are expensed as incurred. Major renewals and improvements are capitalized and the assets replaced are retired.

Impairment Assessment

ExxonMobil tests assets or groups of assets for recoverability on an ongoing basis whenever events or circumstances indicate that the carrying amounts may not be recoverable. Among the events or changes in circumstances which could indicate that the carrying value of an asset or asset group may not be recoverable are the following:

  • a significant decrease in the market price of a long-lived asset;
  • a significant adverse change in the extent or manner in which an asset is being used or in its physical condition including a significant decrease in current and projected reserve volumes;
  • a significant adverse change in legal factors or in the business climate that could affect the value, including an adverse action or assessment by a regulator;
  • an accumulation of project costs significantly in excess of the amount originally expected;
  • a current-period operating loss combined with a history and forecast of operating or cash flow losses; and
  • a current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

Asset valuation analyses performed as part of its asset management program and other profitability reviews assist ExxonMobil in assessing whether events or circumstances indicate the carrying amounts of any of its assets may not be recoverable.

In general, ExxonMobil does not view temporarily low prices or margins as an indication of impairment. Management believes that prices over the long term must be sufficient to generate investments in energy supply to meet global demand. Although prices will occasionally drop significantly, industry prices over the long term will continue to be driven by market supply and demand fundamentals. On the supply side, industry production from mature fields is declining. This is being offset by investments to generate production from new discoveries, field developments and technology and efficiency advancements. OPEC investment activities and production policies also have an impact on world oil supplies. The demand side is largely a function of general economic activities and levels of prosperity. Because the lifespans of the vast majority of ExxonMobil's major assets are measured in decades, the value of these assets is predominantly based on long-term views of future commodity prices and production costs. During the lifespan of these major assets, ExxonMobil expects that oil and gas prices will experience significant volatility, and consequently these assets will experience periods of higher earnings and periods of lower earnings, or even losses. In assessing whether the events or changes in circumstances indicate the carrying value of an asset may not be recoverable, ExxonMobil considers recent periods of operating losses in the context of its longer-term view of prices. While near-term prices are subject to wide fluctuations, longer-term price views are more stable and meaningful for purposes of assessing future cash flows.

When the industry experiences a prolonged and deep reduction in commodity prices, the market supply and demand conditions may result in changes to ExxonMobil's long-term price or margin assumptions it uses for its capital investment decisions. To the extent those changes result in a significant reduction to its long-term oil price, natural gas price or margin ranges, ExxonMobil may consider that situation, in conjunction with other events and changes in circumstances such as a history of operating losses, an indicator of potential impairment for certain assets.

In the Upstream, the standardized measure of discounted cash flows included in the Supplemental Information on Oil and Gas Exploration and Production activities is required to use prices based on the average of first-of-month prices. These prices represent discrete points in time and could be higher or lower than ExxonMobil's long-term price assumptions which are used for impairment assessments. ExxonMobil believes the standardized measure does not provide a reliable estimate of the expected future cash flows to be obtained from the development and production of its oil and gas properties or of the value of its oil and gas reserves and therefore does not consider it relevant in determining whether events or changes in circumstances indicate the need for an impairment assessment.

If events or circumstances indicate that the carrying value of an asset may not be recoverable, ExxonMobil estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying amounts. In performing this assessment, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. Cash flows used in recoverability assessments are based on ExxonMobil's assumptions which are developed in the annual planning and budgeting process, and are consistent with the criteria management uses to evaluate investment opportunities. These evaluations make use of ExxonMobil's assumptions of future capital allocations, crude oil and natural gas commodity prices, refining and chemical margins, volumes, costs, and foreign currency exchange rates. Volumes are based on projected field and facility production profiles, throughput, or sales. Where unproved reserves exist, an appropriately risk-adjusted amount of these reserves may be included in the evaluation. Cash flow estimates for impairment testing exclude the effects of derivative instruments.

An asset group is impaired if its estimated undiscounted cash flows are less than the asset's carrying value. Impairments are measured by the amount by which the carrying value exceeds fair value. Fair value is based on market prices if an active market exists for the asset group, or discounted cash flows using a discount rate commensurate with the risk. Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that ExxonMobil expects to hold the properties. Properties that are not individually significant are aggregated by groups and amortized based on development risk and average holding period.

Other

Gains on sales of proved and unproved properties are only recognized when there is neither uncertainty about the recovery of costs applicable to any interest retained nor any substantial obligation for future performance by ExxonMobil. Losses on properties sold are recognized when incurred or when the properties are held for sale and the fair value of the properties is less than the carrying value.

Interest costs incurred to finance expenditures during the construction phase of multiyear projects are capitalized as part of the historical cost of acquiring the constructed assets. The project construction phase commences with the development of the detailed engineering design and ends when the constructed assets are ready for their intended use. Capitalized interest costs are included in property, plant and equipment and are depreciated over the service life of the related assets.

Source: Exxon Mobil Corp., Annual Report


Property, Plant and Equipment Disclosure

Exxon Mobil Corp., Statement of Financial Position, Property, Plant and Equipment

USD $ in millions

Microsoft Excel LibreOffice Calc

Source: Based on data from Exxon Mobil Corp. Annual Reports

Item Description The company
Property, plant and equipment, cost Carrying amount at the balance sheet date for long-lived physical assets used in the normal conduct of business and not intended for resale. This can include land, physical structures, machinery, vehicles, furniture, computer equipment, construction in progress, and similar items. Amount does not include depreciation. Exxon Mobil Corp.'s property, plant and equipment, cost increased from 2015 to 2016 and from 2016 to 2017.
Property, plant and equipment, at cost, less accumulated depreciation and depletion Tangible assets that are held by an entity for use in the production or supply of goods and services, for rental to others, or for administrative purposes and that are expected to provide economic benefit for more than one year; net of accumulated depreciation. Examples include land, buildings, and production equipment. Exxon Mobil Corp.'s property, plant and equipment, at cost, less accumulated depreciation and depletion declined from 2015 to 2016 but then increased from 2016 to 2017 exceeding 2015 level.

Property, Plant and Equipment Ratios (Summary)

Exxon Mobil Corp., Property, Plant and Equipment Ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Average age hidden% hidden% hidden% hidden% hidden%
Estimated total useful life (years) hidden hidden hidden hidden hidden
Estimated age, time elapsed since purchase (years) hidden hidden hidden hidden hidden
Estimated remaining life (years) hidden hidden hidden hidden hidden
Ratio Description The company
Average age As long as straight-line depreciation is used, this is an accurate estimate of asset age as a percentage of depreciable life. The relative age is a useful measure of whether the company's fixed asset base is old or new. Newer assets are likely to be more efficient. Exxon Mobil Corp.'s average age of depreciable property, plant and equipment deteriorated from 2015 to 2016 and from 2016 to 2017.
Estimated total useful life Over longer time periods, this ratio is a useful measure of company's depreciation policy and can be used for comparisons with competitors. Exxon Mobil Corp.'s estimated total useful life of depreciable property, plant and equipment declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.
Estimated time elapsed since purchase The approximate age in years of a company's fixed assets. Useful for comparison purposes. Exxon Mobil Corp.'s estimated time elapsed since purchase of depreciable property, plant and equipment improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.
Estimated remaining life Exxon Mobil Corp.'s estimated remaining life of depreciable property, plant and equipment declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.

Average Age

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Accumulated depreciation and depletion hidden hidden hidden hidden hidden
Property, plant and equipment, cost hidden hidden hidden hidden hidden
Ratio
Average age1 hidden% hidden% hidden% hidden% hidden%

2017 Calculations

1 Average age = 100 × Accumulated depreciation and depletion ÷ Property, plant and equipment, cost
= 100 × hidden ÷ hidden = hidden%

Ratio Description The company
Average age As long as straight-line depreciation is used, this is an accurate estimate of asset age as a percentage of depreciable life. The relative age is a useful measure of whether the company's fixed asset base is old or new. Newer assets are likely to be more efficient. Exxon Mobil Corp.'s average age of depreciable property, plant and equipment deteriorated from 2015 to 2016 and from 2016 to 2017.

Estimated Total Useful Life

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Property, plant and equipment, cost hidden hidden hidden hidden hidden
Depreciation and depletion expense hidden hidden hidden hidden hidden
Ratio
Estimated total useful life (years)1 hidden hidden hidden hidden hidden

2017 Calculations

1 Estimated total useful life (years) = Property, plant and equipment, cost ÷ Depreciation and depletion expense
= hidden ÷ hidden = hidden

Ratio Description The company
Estimated total useful life Over longer time periods, this ratio is a useful measure of company's depreciation policy and can be used for comparisons with competitors. Exxon Mobil Corp.'s estimated total useful life of depreciable property, plant and equipment declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.

Estimated Age, Time Elapsed Since Purchase

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Accumulated depreciation and depletion hidden hidden hidden hidden hidden
Depreciation and depletion expense hidden hidden hidden hidden hidden
Ratio
Time elapsed since purchase (years)1 hidden hidden hidden hidden hidden

2017 Calculations

1 Time elapsed since purchase (years) = Accumulated depreciation and depletion ÷ Depreciation and depletion expense
= hidden ÷ hidden = hidden

Ratio Description The company
Estimated time elapsed since purchase The approximate age in years of a company's fixed assets. Useful for comparison purposes. Exxon Mobil Corp.'s estimated time elapsed since purchase of depreciable property, plant and equipment improved from 2015 to 2016 but then deteriorated significantly from 2016 to 2017.

Estimated Remaining Life

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Property, plant and equipment, at cost, less accumulated depreciation and depletion hidden hidden hidden hidden hidden
Depreciation and depletion expense hidden hidden hidden hidden hidden
Ratio
Estimated remaining life (years)1 hidden hidden hidden hidden hidden

2017 Calculations

1 Estimated remaining life (years) = Property, plant and equipment, at cost, less accumulated depreciation and depletion ÷ Depreciation and depletion expense
= hidden ÷ hidden = hidden

Ratio Description The company
Estimated remaining life Exxon Mobil Corp.'s estimated remaining life of depreciable property, plant and equipment declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.