US indies write-downs top $40bn as oil falls

OREANDA-NEWS. August 14, 2015. Asset impairment by independent US producers such as Apache, Chesapeake and Devon have topped \\$40bn so far this year as a persistent weakness in crude prices forces them to reset the value of their oil and gas assets.

The write-downs won't immediately impact operations, but it may further strain the producers' balance sheets at a time when they are already grappling with sharply lower cash flow. Most independents who made large impairments posted losses in the second quarter as a result.

Also, their debt-to-asset ratio may widen as oil and gas asset values drop, likely limiting their borrowing ability, especially if markets remain weak.

Moody's Investors Service warned last month that US banks with high energy-sector loans may have to earmark more funds to provide for losses against their lending as a prolonged slump in oil prices strains energy borrowers' ability to service those debts. Wells Fargo and JPMorgan Chase in their second-quarter earnings calls already said that they have experienced asset quality deterioration in their energy loan portfolios.

Crude prices are half of their year-ago levels, which means the worth of the oil and gas these producers hold in their fields have also plunged.

Of the medium to large US independent producers, Apache has made the biggest write-down so far this year, at \\$13.13bn. In the second quarter, it took a pre-tax hit of \\$4.3bn on its proven oil and gas properties in the US, \\$835mn for assets in Canada and \\$663mn for North Sea. That's in addition to \\$5.3bn in the first quarter on its US oil and gas properties, \\$1.4bn for Canada and \\$632mn for the North Sea. In the second quarter of last year, it had recorded a \\$203mn write-down for the North Sea.

Apache carries out a country-by-country test every quarter of its oil and gas properties using a full-cost accounting method, a formula used by most other independents. Under that, all costs, including successful and unsuccessful exploration activities and salaries must not exceed a certain ceiling. The ceiling is the estimated after-tax future net cash inflow from the reserves, discounted by 10pc per annum and adjusted for hedges. Except where prices are calculated by contractual agreements, the company works out net future cash flow by calculating costs and the average commodity price in effect on the first day of each of the previous 12 months.

Chesapeake has the second largest writedowns, with a pre-tax impairment of \\$10.08bn in the first six months.

"Costs of oil and natural gas properties exceeded the ceiling, resulting in an impairment in the carrying value of our oil and natural gas properties," Chesapeake said. "Based on the first-day-of-the-month prices we have received over the 11 months ended 1 August, we expect to record another material write-down in the carrying value of our oil and natural gas properties in the third quarter."

Devon took a \\$9.63bn hit for the first half of the year for its US oil and gas assets using the same full-cost method.

Chesapeake's guidance implies that many other independents, particularly those like Marathon Oil, EOG Resources and ConocoPhillips who have taken small write-downs so far this year, may have to make similar announcements in the future. Some, like Occidental, have also made a small impairment this year, of \\$324mn, but took a pre-tax hit of \\$7.4bn last year, giving it room to hold back on making large resets.

The world's largest independent oil and gas producer ConocoPhillips has recorded an impairment of only \\$224mn this year following a pre-tax \\$860mn hit in 2014. Whiting Petroleum so far hasn't made any impairment on its proved reserves in 2015 and 2014.