By Christopher M. Matthews and Rebecca Elliott
Chevron Corp. is writing down the value of its assets by more
than $10 billion, a concession that in an age of oil and gas
overabundance, some will not be profitable anytime soon.
In the largest energy industry write-down in years, Chevron said
Tuesday that it was cutting the value of a number of properties,
notably its U.S. shale holdings in Appalachia, by a combined $10
billion to $11 billion. Chevron is also restructuring its
operations to focus on fewer prospects in the face of persistently
low natural gas prices, and will explore sales of some assets.
The second-largest U.S. oil company lowered its forecast for
future commodity prices, and said that as a result, it was reducing
the value of production from one of its offshore oil projects in
the Gulf of Mexico, called Big Foot. It also lowered the value of a
planned facility to export liquefied natural gas from Canada.
Chevron Chief Executive Mike Wirth said in an interview that the
company had performed well in a difficult market but wanted to
focus on its most promising future prospects, including an
expansion of shale oil drilling in Texas.
"We have to make the tough choices to high-grade our portfolio
and invest in the highest-return projects in the world we see ahead
of us, and that's a different world than the one that lies behind
us," Mr. Wirth said.
Chevron's shares closed up less than a percentage point at
$117.90 prior to the announcement Tuesday.
The sobering reappraisal by one of the world's largest and
best-performing oil companies is likely to ripple through the
oil-and-gas industry, forcing others to publicly reassess the value
of their holdings in the face of a global supply glut and growing
investor concerns about the long-term future of fossil fuels.
Particular pressure is falling on shale producers, especially
those focused on natural gas in places like Pennsylvania, which are
struggling with historically low U.S. prices caused by
oversupply.
Chevron's move follows a $5 billion write-down by Spain's Repsol
SA earlier this month and an impairment of $2.6 billion by the
U.K.'s BP PLC in October. Industry executives and analysts
anticipate that many more oil-and-gas companies will soon write
down billions in value to comply with accounting standards because
low commodity prices have undermined the economics of many
projects.
Many companies are also expected to substantially reduce the
value of their oil and gas reserves, figures once seen as an
essential measures of their long-term security, under separate
reporting requirements governed by the Securities and Exchange
Commission amid uncertainty over whether the fossil fuels can be
extracted cost-effectively.
Chevron may restate its reserves to the SEC after any asset
sales, a company executive said.
"As the data gets more compelling, they have to face it," said
Myron Boots, co-founder of reservoir engineering consulting firm
Buckley & Boots LLC, noting that many wells have failed to live
up to expectations.
Exxon Mobil Corp. has written down the value of its U.S. natural
gas assets by about $2.5 billion over the last several years,
though some analysts have said it should further devalue its
largest shale asset, XTO Energy Inc., which it bought for more than
$30 billion in 2010.
An Exxon spokesman said it is difficult to compare write-offs
across companies and that various factors drive impairment
decisions.
Only 20 years ago, the oil-and-gas industry was worried about
running out of fossil fuels and scoured the world for reserves.
Today, it faces a different problem: too much oil and gas.
An abundance of discoveries over the last decade, particularly
the flood of oil and gas unlocked by the U.S. shale boom, has led
to consistently low commodity prices and eaten into fossil fuel
companies' profits. The techniques behind the boom, horizontal
drilling and hydraulic fracturing, have upended global markets, Mr.
Wirth said.
"They have truly transformed the market mind-set from one of
scarcity to one of abundance," he said. "It's the story of our
industry."
Russia and OPEC have been curtailing oil production for years to
put a floor under global prices and agreed last week to further
cuts of 500,000 barrels a day until the end of March.
Still, oil companies have struggled to reap the profits of old
and are falling out of favor with investors amid fears that
electric vehicles and renewable energy, along with government
regulations to address a warming planet, will constrain their
futures.
Oil-and-gas companies now make up about 4% of the S&P 500
index, down from roughly 10% a decade ago, FactSet data show.
Amid the changing landscape, Chevron has pulled back on its
global footprint. It now operates in around 18 countries, according
to the company, down from nearly 40 earlier this decade. Mr. Wirth
said Chevron must be selective about its investments moving
forward, focusing on oil-rich regions like the Permian Basin in
West Texas and New Mexico.
The company is also undertaking a restructuring, going from four
global production units to three. "Companies that wait until change
is forced upon them fail," Mr. Wirth said in a video sent to
employees last week. "We're not going to let that happen at
Chevron."
Some of the layoffs are likely to come from the company's unit
in Appalachia. The company is exploring a sale or strategic
alternatives for those assets and the Kitimat LNG project in
Canada, one of the projects included in the write-down.
Chevron made a big bet on natural gas in 2010, when it acquired
Atlas Energy Inc. for $3.2 billion and assumed $1.1 billion of the
Appalachian producer's debt. At the time, gas prices had tumbled
21% to about $4.21 per million British thermal units. Chevron upped
its wager in 2011 with more acquisitions in region through private
transactions that analysts valued at about $1.6 billion at the
time.
Those bets look misguided today. On Tuesday afternoon, prior to
Chevron's announcement, natural gas prices were roughly $2.26 per
MMBtu, up about 1.4% on the day.
Over the past decade, frackers helped release a gusher of gas
that has driven down costs for consumers. But the amount of natural
gas produced in the U.S. has exceeded U.S. consumption since 2017,
Energy Information Administration data show. Gas prices are
expected to continue falling, to an average of about $2 per MMBtu,
next year, according to analytics firm IHS Markit.
The result has been prolonged hardship for U.S. gas drillers and
their investors -- one that's expected to last well into the next
decade, particularly for companies focused on the Appalachian
region, which contains much gas but little oil.
Chevron is one of the largest leaseholders in Appalachia but
only the 18th largest producer there, according to energy
consulting firm Rystad Energy, and has fared better than many of
its competitors.
Mr. Wirth said that while some natural gas projects have become
uneconomic, the fuel remains an important part of Chevron's
strategy.
"The world runs on oil and gas today and any energy transition
will take time," Mr. Wirth said. "Our commitment is to be a
responsible provider of that oil and gas."
Bradley Olson contributed to this article.
Write to Christopher M. Matthews at christopher.matthews@wsj.com
and Rebecca Elliott at rebecca.elliott@wsj.com
(END) Dow Jones Newswires
December 10, 2019 16:31 ET (21:31 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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