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

October 23, 2015

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

The oil and gas industry’s earnings season is barely underway, 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 — booked $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.

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 have declined 64 percent in the past year, and Phoenix-based Freeport-McMoRan’s are down 61 percent.

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,” Timothy Parker, a Baltimore-based fund manager at T. Rowe Price Group Inc., said in an e-mail. “However, it won’t generally hurt the companies because very few have debt covenants that are linked to book value, which the writedowns affect.”

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