Im­pair­ment Charges Down in U.S.

Write­downs in the Amer­i­can oil patch are drop­ping. But the Cana­dian oil sands re­mains a wild card

Alberta Oil - - SMART MONEY - Mark Young is a se­nior oil and gas an­a­lyst with Eval­u­ate En­ergy and CanOils.

With oil prices trend­ing up­ward in early 2016 and later sta­bi­liz­ing, the value of to­tal im­pair­ments be­ing recorded by U.S. up­stream oil and gas com­pa­nies has been drop­ping quar­ter by quar­ter. In the first nine months of 2016, 90 U.S. com­pa­nies recorded to­tal im­pair­ments of just over US$36 bil­lion. To put it in per­spec­tive, that’s a mere 18 per­cent of 2015’s an­nual im­pair­ment to­tal of al­most US$200 bil­lion.

Those 90 com­pa­nies are all listed on U.S. stock ex­changes and a sig­nif­i­cant por­tion of their pro­duc­tion vol­umes are from the United States. Quar­ter by quar­ter, not only are the 2016 to­tals lower than any of those recorded since the price down­turn took hold in Q4 2014, there has also been a steady de­cline in the to­tal write-downs in more re­cent pe­ri­ods. For ex­am­ple, Q3 2016’s to­tal im­pair­ments of US$6 bil­lion were only 31 per­cent of Q1 2016’s to­tal of more than US$19 bil­lion.

A ris­ing oil price in 2016 is the main fac­tor here. Since Jan­uary 2016, when WTI prices av­er­aged around US$34 per bar­rel, WTI has risen by about 44 per­cent to av­er­age US$49 per bar­rel in Novem­ber. In late 2015, when the WTI price had dropped from an av­er­age of US$46 in Septem­ber 2015 to US$34 by Jan­uary 2016, as­set im­pair­ments and over­all drops in com­pany val­ues were to be ex­pected.

ExxonMo­bil’s re­cent ad­mis­sion that it may have to con­cede that 4.6 bil­lion bar­rels of re­serves, in­clud­ing oil sands in Canada and other North Amer­i­can re­serves, are cur­rently not prof­itable to pro­duce could change the fi­nal im­pair­ment to­tals for 2016. This would sig­nal a sig­nif­i­cant change in ac­count­ing pol­icy, and could be 2016’s big­gest im­pair­ment in the U.S. oil and gas in­dus­try.

Un­til then, how­ever, Devon En­ergy holds that du­bi­ous record. It re­ported im­pair­ments of US$4.9 bil­lion for its North Amer­i­can port­fo­lio in the first nine months of 2016. One-quar­ter of the re­serves that Devon held as of year-end 2015 were as­so­ci­ated with Cana­dian heavy oil prop­er­ties, but the com­pany does not spec­ify how much of 2016’s im­pair­ments, if any at all, were re­lated to those as­sets in par­tic­u­lar.

Other U.S.-listed com­pa­nies with 2016 im­pair­ments and sig­nif­i­cant Cana­dian hold­ings in­cluded En­cana and En­er­plus.

En­cana recorded im­pair­ments of US$493 mil­lion in Canada, rep­re­sent­ing 35 per­cent of its to­tal im­pair­ment charge of just un­der US$1.4 bil­lion. Un­til 2016, En­cana had not recorded any im­pair­ments in Canada dur­ing the down­turn. Last year, En­cana did record US$6.5 bil­lion in im­pair­ments, but they all re­lated to its U.S. as­sets only.

En­er­plus, for its part, has re­ported $256 mil­lion (about US$196 mil­lion) in im­pair­ments in the first nine months of 2016. Only 17 per­cent of this to­tal—about $44 mil­lion—was re­lated to its Cana­dian as­sets. Per­cent­age-wise, this is roughly in line with 2015, when En­er­plus re­ported $286 mil­lion in Cana­dian im­pair­ment ex­penses, or about 21 per­cent of its to­tal im­pair­ment charge of $1.35 bil­lion.

As for the rest of Canada’s E&P play­ers, we’ll have to wait and see. Ac­count­ing dif­fer­ences be­tween U.S.listed com­pa­nies and Toronto-listed com­pa­nies means they re­port as­set write-downs on an an­nual ba­sis, for the most part, rather than in each and every ap­pli­ca­ble quar­ter. A trend sim­i­lar to the U.S. do­mes­tic scene, how­ever, should be ex­pected.

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