E&P Q2 Impairment Tsunami - Damage Assessment Part I: Full Cost Companies

Aug. 19, 2015 11:06 AM ETAXAS, DMLP, DEN, DVN, EOX, FANG, FC, GPOR, BATL, AMPY, MTDR, PQ, REI, REN, SD, ENB, SBOW, TALO, SNEC, SWN, UPLCQ, VNOM, VNR, WTI, XCO, CTRA, ENB:CA41 Comments
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Raw Energy
3.38K Followers

Summary

  • A recent article by the author discussed likely impairments in 2Q E&P earnings reports, with estimated impairments for up to 90 companies.
  • With earnings season now complete, an analysis of actual impairments for full cost companies is presented.
  • Other balance sheet, financial activity and reserve value estimates are calculated for 2015.
  • EBITDA, cash flows and other metrics are calculated and presented for analysis.
  • Looming bank borrowing base redeterminations amidst continuing price weakness present continued major difficulties for FC companies during 2015.

OVERVIEW

The 2Q earnings season for E&P companies is now complete. Roughly a month ago, I wrote an article, Upcoming E&P Earnings:Impairment Tsunami Warning, that attempted to highlight (1) the likely level of impairments to be reported by companies that utilize the full cost (FC) accounting method, and (2) a Full Cost Equivalent (FCE) method for analyzing successful efforts (SE) companies to make them consistent with full cost impairment standards. This type of analysis is critical when comparing companies using different accounting methods, including valuation and many real world applications, which I described in an earlier article, An E&P Impairment Corollary...

In summary, FC companies are required to book impairments to their Plant, Property and Equipment (PP&E) account if the PP&E for proved reserves exceeds the companies' SEC value (the present value of proved reserves with prices, expenses and development costs held constant and discounted at 10%). In constructing SEC values, the 12 months' trailing average monthly prices are utilized, based on arithmetic averages on the first day of each month.

In an environment where oil and/or natural gas prices decline sharply, as they have done in the past 12 months, such lower prices are incorporated into companies' financial statements and SEC reserve values over a period of a year or more. The stock market may react much quicker than that so the impact on financial statements may already be reflected in stock prices. The movement of stock prices in reaction to recent earnings reports, including impairments as well as updated guidance, indicates that may not be entirely true though.

My previous article focused primarily on the impairment projections for approximately 80 E&P companies, and the impact that impairments would have on their balance sheets and book values. The differences between FC and SE companies in the way they calculate impairments makes

This article was written by

Raw Energy profile picture
3.38K Followers
25 years in energy M&A/Corporate Finance business career. Senior officer for public E&P companies, including MLP, charged with overseeing (at different times) accounting, tax, legal, investment banking/analyst relations, investor relations, as well as business unit with land, engineering, geological and support functions. Used legal background to interface with and direct outside investment bankers, law firms and accounting firms in M&A transactions and offerings. Personal investments and trading 15 years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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