2015 already a record year for writedowns, IHS says

HOUSTON — Exploration and production companies have already made 2015 a record year for writedowns and impairments, according to energy consulting group IHS.

Beleaguered drillers wrote off $29 billion in the first quarter of the year alone, more than the 2014 full-year total of about $25 billion. Halfway through reporting on the second-quarter, the total value of writedowns has jumped to about $49 billion, surpassing the $48 billion in writedowns companies took when oil markets last seriously tanked in 2008, according to IHS numbers.

“2015 is going to be a record year for impairments,” said Paul O’Donnell, a principal analyst at IHS, in an interview.

Impairments or writedowns are the result of companies adjusting down the value of assets they list on their books. In the oil and gas industry, the U.S. Securities and Exchange Commission allows companies to value their reserves using the average of oil prices from the last 12 months. As that price has fallen, so has the value of the reserves oil companies keep on their books. IHS’ figures come from a study of 66 small, medium and large North American companies.

For the first quarter of 2015, companies determined the value of their reserves at $82.71 per barrel oil price, down only slightly from $94.99 per barrel at the end of 2014. By the end of 2015, that number will fall even lower, O’Donnell said.

“Our projection for the end of 2015 is for a determining price of around $53, and that compares to the second quarter price which was around $71 dollars,” O’Donnell said.  “A lot more reserves are going to uneconomic and we expect to see a lot more impairments come third quarter and year end.”

Some of the largest first-quarter impairments happened at only a few companies. Apache Corp. took a $7.2 billion price-related charge, while Devon Energy saw a $5.5 billion charge and Chesapeake Energy took a $5 billion hit. On Wednesday, Chesapeake said it would take another $4 billion writedown in the second quarter.

The large impairments could squeeze finances at companies hit the hardest. Oil and gas companies often borrow against the value of their reserves, and could see their access to capital slip if their base shrinks.

“E&Ps taking major writedowns could have difficulty obtaining financing from their banks if prices remain depressed,” O’Donnell said in a statement.