Energy Companies Gird for Weaker Prices in 2016
December 25 2015 - 5:59AM
Dow Jones News
By Erin Ailworth
In a sign that U.S. energy producers think oil and gas prices
will languish through next year, several are slashing their already
slimmed-down budgets even more.
Eight companies including ConocoPhillips Co. and Marathon Oil
Corp. collectively will spend $21 billion less in 2016 than they
did last year when oil traded over $100 a barrel. American crude
has since plunged by 60% to roughly $38 a barrel.
ConocoPhillips plans to cut spending next year by 55%, when
compared with its 2014 budget, to $7.7 billion. Marathon's 60% cut
to a $2.2 billion budget for 2016 is even steeper.
In theory, such limited budgets should take a bite out of
production, but some companies predict that efficiency gains will
allow them to pump more next year even as they spend significantly
less on their operations. ConocoPhillips expects production to rise
by as much as 3% in 2016.
The longer it takes for U.S. oil production to fall, the longer
crude prices will languish. The low-price trend has already
triggered a massive wave of asset write-downs.
Energy companies use commodity prices to estimate how much their
oil-and-gas reserves in the ground are worth, so when prices fall
those assets take a hit. In the last 12 months, oil has dropped
from $69 a barrel to roughly $38, while natural gas has plummeted
from $4 per million British Thermal Units to under $2.
Falling natural-gas prices are hitting U.S. energy companies
just as hard as the crude-oil bust.
The strain showed as oil and gas producers reported their latest
earnings, collectively writing off more than $60 billion in the
third quarter, according to data collected by S&P Capital IQ.
Some of the biggest charges were chalked up to the price of natural
gas, which has dropped by nearly 51% in the last 12 months, more
than oil's 46% decline.
The third-quarter charges represent nearly half of the roughly
$134 billion written off by U.S. producers so far this year.
Several of the most prominent American energy producers--including
EOG Resources Inc. and Occidental Petroleum Corp.--booked
impairments of $2 billion or more as natural-gas prices bit into
the value of their holdings.
The big impairments suggest "that money you spent in the past
hasn't given you a good economic outcome," said Tom Driscoll,
managing director at Barclays. "You acquired assets that aren't
worth what you paid for them."
Collectively, U.S. producers are taking tens of billions of
dollars more in write-downs on their assets than they did during
the oil bust of 2008.
The charges are a sign that many companies think energy prices
are going to stay low and may be reconsidering their plans to drill
in more expensive areas or on untapped acreage, industry experts
said.
The U.S. Securities and Exchange Commission has been pressing
producers to detail how a prolonged period of low energy prices
would affect the value of their reserves, particularly those in
areas where drilling hasn't yet taken place, said Marc Folladori, a
lawyer with Haynes and Boone LLP who advises energy companies.
"These are really grim times," he said. "Gas, they're at the
point where it is less or not economically feasible at all to
produce it."
A glut of natural gas has helped push prices down over the last
several years, while large-scale exports that might ease the
oversupply aren't expected to begin in significant volumes until
2020. Warm winter weather forecast for this season won't help;
demand for gas to heat homes is expected to be lower than in
previous years.
The largest third-quarter write-down was logged by EOG,
according to data from S&P Capital IQ. The Houston-based
company blamed a $6.3 billion impairment on the eroded value of
several properties, mainly aging gas fields and less economic
drilling areas in the U.S. The impaired properties, once worth $8.9
billion, are now valued 70% lower at just $2.6 billion because of
low gas prices, EOG said in a regulatory filing. The company
declined to provide further detail.
Occidental booked a charge of more than $3 billion in the third
quarter and linked $924 million of that to its U.S. gas operations.
The company declined to provide more detail.
Chesapeake Energy Corp. and Southwestern Energy Co., two
companies that pump more gas than oil, also took big hits.
Chesapeake wrote off $5.4 billion in oil and gas properties and
other assets, according to financial filings, while Southwestern
wrote down nearly $3 billion. Both declined to comment.
The write-downs show which companies bought assets at high
prices, and now may struggle because they have lots of debt or are
spending too much, analysts said.
"Those are the companies that will not survive this cycle and be
forced to consolidate," said Daniel Katzenberg, an analyst with
Robert W. Baird & Co.
Write to Erin Ailworth at Erin.Ailworth@wsj.com
(END) Dow Jones Newswires
December 25, 2015 05:44 ET (10:44 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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