SINCE THE PRICE of oil suddenly dropped in late 2014, nearly 400 public oil and gas companies have written down over $180 billion of reserve value. This is in stark contrast to less than $40 billion written off in the last price collapse of 2008-09. The write-downs hit their apogee in the Q4 2015, when nearly 100 companies wrote off nearly $50 billion. Hein & Associates’ study included over 500 public companies that had reached nearly $1 trillion in total asset value in mid-2014. As of Q2 2016 those same companies had a total asset value of less than $700 billion. Their write-downs amount to approximately 30% of their entire balance sheet.
Reserve write-downs are not uncommon and obviously tend to correlate with falling oil prices. However, 2015 was a record-setter with over $144 billion of write-offs, far surpassing the paltry $58 billion that was written off in Q4 2008 and Q1 2009. However, the 2008-09 price plunges were far more dramatic than the drop in 2014 – going from over $145/bbl to under $40/bbl in five months. The 2014-15 drop is proving to be of longer duration and more fundamentally-based than the drop in 2008-09. Figure 2 shows the total asset value of the surveyed companies compared to WTI.
In 2010, the SEC mention revised its oil and gas reserve estimation and disclosure requirements, which, among other things, modified the price estimates to a 12-month average price instead of a single day price (e.g., year-end price). Essentially, this masked much of the drop in reserve value that occurred in late 2014, when WTI ended the year at $55, but averaged over $93 for the year. Hence, without the price change (to an annual average) the write-downs would have been far more severe in Q4 2014. Combining the price nadir with the fact that most companies’ hedges dropped off by mid-2015, a recipe for disaster was brewing. Average WTI prices for the past four years were:
Reserve write-downs run in close parallel to bankruptcies. According to Texas-based law firm Haynes and Boone LLP, there have been 90 E&P company bankruptcies since January 2015, with total secured and unsecured debt of more than $66 billion. Most of the bankrupt companies had written down their balance sheets prior to filing. The same trend existed in 2008-10, when nearly 100 E&P companies filed for bankruptcy.
In summary, reserve write-downs follow drops in oil prices. It appears that asset write-downs will decrease for the remainder of 2016. That said, there may be more write-downs in store if prices do not improve over the next four quarters.
JIM HARDEN, HEIN & ASSOCIATES, HOUSTON