Dollars and Jens
Friday, March 12, 2004
On Not Taking Accounting Numbers As Given
There are a couple of stories in Thursday's Wall Street Journal (both of which start on page C1, in case you're following along at home) that highlight the importance of looking behind reported financial numbers. To start with, the newly-out-of-bankruptcy Global Crossing has set a U.S. record, by a factor of three, by reporting $24.879 billion in earnings (roughly $622/share) in the quarter ending December 31. The stock now has a ttm P/E ratio of .029. This does not necessarily indicate a bargain stock. There's a version of the story free on the web:
The telecommunications carrier Wednesday reported net income of $24.879 billion, which included reorganization-related gains that totaled $24.882 billion. The company didn't say what its results would have been excluding the gains. [Subtraction is left as an exercise for the reader. -- SJ]I seem to remember that JDSU took a quarterly loss twice that big a few years back.
As part of the reorganization, Global Crossing said it eliminated $8 billion in liabilities. Among other things, the company also recapitalized the business, which included the elimination of $16 billion in common and preferred equity, and $25 billion in accumulated losses as of Dec. 9, the date the company emerged from Chapter 11.
The other story in the Journal is titled "Oil Reserves Can Sure Be Slick". You may (or may not) remember that a couple months ago, Royal Dutch/Shell lowered its "proved reserves" estimates. Quoth the Journal:
Every year, under U.S. accounting rules whose origins date to the 1970s energy crisis, publicly traded energy companies must publish disclosures detailing their production activities, estimates of their proved oil-and-gas reserves and estimates of the present value of the future cash-flow streams those reserves are expected to generate.
These aren't easy things to estimate -- as most energy companies readily point out in their annual reports. After all, the crude and natural gas sometimes are buried miles below the ground, often beneath deep water.
Indeed, when accounting regulators set the current disclosure rules in 1982, they decided that the figures only should be reported as "supplementary" information outside companies' official financial statements. The reason they cited at the time: the numbers weren't reliable enough to justify the cost of having them audited independently.
As of 1975,
energy companies had a choice between two types of financial-statement accounting, one called "successful efforts" favored by large multinationals, and the "full cost" approach favored by smaller independent drillers. The Financial Accounting Standards Board initially required the more-conservative successful-efforts approach, which forces companies to record drilling expenses more aggressively than under the other method. But in 1978, the Securities and Exchange Commission ruled that both methods would be acceptable. The commission then launched its effort to begin requiring disclosure of companies' reserves, in part to foster comparability between companies reporting under the different methods. It left the drafting of the disclosure rules to the FASB, which completed them in 1982.
I'm doing an internship with an energy analyst. He doesn't consider earnings to be comparable between companies. EBITDAX (EBITDA before exploration expenses) is more consistent. Cash flow is, at least, precise.