What Devon's Huge Write-Down Means for Natural Gas

Includes: APC, CHK, DVN, HK
by: Jake Huneycutt

For investors thinking about buying into natural gas company stocks right now, you might want to hold off for a few weeks until earnings season is over and done with. Devon Energy (NYSE:DVN), an oil and natural gas producer, released 4th Quarter earnings on Wednesday morning and took a massive $7.1 Billion write-down in their oil and natural gas properties. To put this in perspective, it drops their book value from $57 range all the way down to the $38.50 range. The market strangely appears to have been caught off-guard by this development as Devon’s stock price has fallen about 5% since the release.

With the exception of Devon, most of the other natural gas producer stocks were up for the day. Yet, it stands to reason that if Devon took such a huge write-down, the other oil and natural gas companies will be required to absorb them as well. This would seem to be all but a certainty given the precipitous drop in gas prices over the past few months. Keep a close eye on Chesapeake (NYSE:CHK), Petrohawk (NYSE:HK), and Anadarko (NYSE:APC) over the next few weeks to see how large the impact will be for those producers.

Long-term, there are lots of reasons to be bullish on natural gas stocks, but it appears that these stocks have gotten ahead of themselves a bit for the moment. Many believe that the Obama Administration will be good for natural gas, which has sparked a new round of bullishness. However, any hypothetical impact of the Obama Administration when it comes to natural gas prices has been exaggerated by the market. Petrohawk is up over 25% in just a few weeks’ time. That is partially explained by their recent press release regarding reserve levels, but it also seems to be a part of this mini-natural gas bull we have experienced over the past few weeks.

If you want to buy into natural gas producers right now, my advice is to watch out for falling asset prices over the next few weeks. If prices fall this month, as I expect they will, I will probably jump in on HK, CHK, or DVN. If you are already long on these stocks, they are still good long-term investments and I see no reason to panic. These write-downs are paper charges and do not affect the cash flows for any of the companies. Just be prepared for some short-term ugliness as the market seems to suddenly realize that natural gas asset prices have fallen.

It has been noted that Anadarko (APC) uses "successful efforts" accounting as opposed to full-cost accounting. The former method is more conservative and hence, APC was not required to absorb significant impairment charges for their 4th Quarter results.

Disclosures: Author has no current position on any natural gas companies, but may choose to go long on HK, DVN, or CHK within the next month.