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.

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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:

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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.

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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.

Source: http://www.ogfj.com/articles/print/volume-13/issue-9/departments/capital-perspectives/unprecedented-reserve-write-downs.html
JIM HARDEN, HEIN & ASSOCIATES, HOUSTON