$6.5 Billion in Energy Writedowns and We’re Just Getting Started

October 23, 2015

We will have to pay close attention to the writedowns in the energy sector that will surely only grow for the $6.5 billion so far this quarter. While these writedowns should not be a surprise simply due to the lower oil price they do shed a negative light on the industry and will make investors reevaluate the companies they hold.

2015 continues to be a year where you need to be very diligent in picking the stocks you invest in. The weak stocks have already started to sell off and now it’s the fringe stocks that will follow down.

Click here to visit the original posting page over at Bloomberg.

…

Southwestern reported $2.8 billion impairment in third quarter
Freeport-McMoRan posts charge of $3.7 billion on oil and gas

The oil and gas industry’s earnings season is barely under way, and already there’s been $6.5 billion in writedowns.

On Thursday, Freeport-McMoRan Inc. reported a $3.7 billion charge for the third quarter, while Southwestern Energy Co. — which has a market value of $4.5 billion — recorded $2.8 billion. And that’s just the beginning. Barclays Plc estimated in an Oct. 21 analysis that there could be $20 billion in charges among just six companies. Southwestern’s writedown was double Barclays’ forecast.

“We also received many scars in the past tough times, and we’ll have many more before the cycle is finished,” said Steven Mueller, Southwestern chief executive officer, during a conference call with analysts on Friday.

Oil prices have tumbled 44 percent in the past year, and natural gas is down 35 percent, making the write-offs a foregone conclusion from an accounting standpoint. The companies use an accounting method that requires them to recognize a charge when estimates of future cash flow from their properties falls below what the companies spent buying and developing the acreage. The predictions of future cash flow have fallen along with prices.

Since it’s no secret oil and gas prices have plunged, “the majority of write-offs are typically non-events,” said Barclays’ analysts led by Thomas R. Driscoll in the report.

Share Plunge

Southwestern’s shares declined 5 percent today to $11.07, 67 percent lower than a year ago. Phoenix-based Freeport-McMoRan’s are down 62 percent in the past 12 months.

Barclays predicted ceiling-test impairments for Apache Corp., Chesapeake Energy Corp., Devon Energy Corp., Encana Corp. and Newfield Exploration Co. All five companies are scheduled to report third-quarter results in November.

“Many companies will have writedowns as the price of oil is about half of where it once was and gas is also down,” said Timothy Parker, a Baltimore-based fund manager at T. Rowe Price Group Inc.. “However, it won’t generally hurt the companies because very few have debt covenants that are linked to book value, which the writedowns affect.”

Oil

Discussion

6 Comments

Silverdollar

Oct 23, 2015 23:04 PM

When write-downs happen, the Co. still possesses the same gallons, ounces, bushels, board feet, whatever. The write-down simply reduces the recognized value of the asset for accounting purposes. The last paragraph in the article says it all. JMO

Bob UK

Oct 23, 2015 23:06 PM

I was just wondering whether such write-downs make some of these stocks potentially buyable – don’t we often see companies that have taken huge write-downs then have their stock price soar in the following 12 months?

Obviousy not all do this but some do don’t they?

Silverdollar

Oct 23, 2015 23:21 PM

I would think that if the stock reacts very negative in percentage terms to the write-down news you may be on to something.

Excelsior

Oct 25, 2015 25:39 AM

Great point Silverdollar. It is just an exercise in accounting, but the assets are still there waiting for a better price environment.

Jason

Oct 23, 2015 23:25 PM

Stocks up, $ up, gold up. Red flags anyone?

Excelsior

Oct 25, 2015 25:39 AM

yes.

Welcome!

$6.5 Billion in Energy Writedowns and We’re Just Getting Started

Share Plunge