Write-Downs Abound for Oil Producers
14 September 2015 - 9:20AM
Dow Jones News
By Ryan Dezember
U.S. oil-and-gas producers have written down the value of their
drilling fields by more in 2015 than any full year in history, as
the rout in commodity prices makes properties across the country
not worth drilling.
A group of 66 oil and gas producers have taken impairment
charges totaling $59.8 billion through June, according to a tally
by energy consultancy IHS Herold Inc. That tops the previous
full-year record of $48.5 billion set in 2008, IHS says.
In 2008, oil prices plummeted from above $140 a barrel at
midyear to below $37 by year-end as the financial system's near
collapse sent the global economy into recession. The drop was steep
but relatively short-lived as growing demand from China and other
emerging economies was expected to suck up global supplies.
Now, with China's economy sputtering and U.S. production at its
highest level in decades, prices aren't expected to return to the
$100 level of recent years any time soon.
Write-downs, or impairments, are taken by companies when the
value of assets falls below the value on its books. For energy
fields, that can mean that the price of leasing land, drilling and
installing pipelines exceed the worth of whatever oil and gas is
unearthed.
Anadarko Petroleum Corp., Chesapeake Energy Corp. and Devon
Energy Corp. are among the large energy companies that have taken
multibillion-dollar impairments this year, while dozens of smaller
companies have made proportionally large write-downs.
Writing down assets can shrink the pool of oil-and-gas reserves
that are used as collateral for loans. Because many oil-and-gas
producers spend more than they make selling commodities, abundant
credit is crucial to them being able to keep going. These
companies' shares are often valued on forecast production growth
more than current profitability.
This year's impairment tally is certain to grow, even if oil
prices buck forecasts and move higher.
U.S. securities regulators require exploration-and-production
companies to value drilling properties and reserves according to
energy prices over the previous 12 months. That means the formulas
used to calculate their value at the end of June still included
prices from the second half of last year, before oil prices had
made much of their descent to their current price around $45 a
barrel.
"There's a disconnect between the 12-month average and reality,"
said IHS analyst Paul O'Donnell. "There will be pricing impairments
for the next two quarters, at least."
Prices used to determine asset values at the end of June were
$71.50 a barrel for oil and $3.40 a million British thermal units
for natural gas, IHS says. That compares with U.S. crude prices of
$59.47 a barrel and $2.83 for natural gas on June 30. The
consultancy expects the prices used at year-end to determine asset
value will be around $50.50 and $2.80, respectively.
At those prices, very few U.S. drilling properties, particularly
shale fields, produce profits, analysts and bankers say.
The write-downs have deflated some of the shale boom's
highfliers. Chesapeake, which rose from a $50,000 startup to become
the country's second largest natural-gas producer by gobbling up
huge swaths of shale, has written off about $10 billion this year.
That is about twice the Oklahoma City company's stock market
value.
Some of the write-downs can be chalked up to the drilling land
grab that took place over the last decade. At the time many
wildcatters quickly leased as much land as they could around new
shale prospects before competitors caught wind and drove up prices.
The consequence of doing so was that big prices were paid for
properties that often turned out to be beyond the best drilling
areas.
"Companies are having to admit that when they made decisions
about development and spending money to drill they anticipated
higher prices, and their assets aren't worth as much as they were
at $100 a barrel," said Becky Roof, a managing director at
turnaround firm AlixPartners LLP.
At its peak and under the leadership of co-founder Aubrey
McClendon, Chesapeake leased drilling land at a furious pace,
staking claim to some 16 million U.S. acres, a land mass slightly
larger than West Virginia. Mr. McClendon's race to grow was well
received by investors when energy prices were higher. But when gas
prices plummeted in 2009 due to the glut of fuel that his and other
companies had produced, Chesapeake ran into financial troubles,
made a similarly large write downs, and in early 2013 ousted Mr.
McClendon.
Now swaths of Chesapeake's territory have been sold or deemed
uneconomic to drill.
The IHS tally doesn't include large integrated oil companies,
such as Chevron Corp., which said in July that it booked $1.96
billion in impairments and $670 million in charges related to
project suspensions and adverse tax effects tied to declining oil
prices.
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(END) Dow Jones Newswires
September 13, 2015 19:05 ET (23:05 GMT)
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