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E&P Writedowns Loom As Reserves Overvalued By 60%
In principle, investors should be able to look to SEC filings for reliable information on publicly traded companies. As Bloomberg reports however, the commission’s rules on how drillers are required to value their reserves is effectively forcing companies to overstate the value of their O&G businesses by nearly two-thirds.
Via Bloomberg:
The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.
Continental Resources (who reminded Bloomberg that it’s “just following the rules like everyone else”), reported the following data on proved reserves early last month:
PDP reserves increased 21% from year-end 2013 to 490 MMBoe at December 31, 2014. The Company had 2,994 gross (1,565 net) proved undeveloped (PUD) locations at year-end 2014. The Bakken accounted for 82% of PUD locations at year-end. Continental's year-end 2014 proved reserves had a net present value discounted at 10% (PV-10) of $22.8 billion, a 13% increase over PV-10 of $20.2 billion for year-end 2013 proved reserves.
As it turns out, the PV of the company’s proved reserves using current depressed oil prices is nearly $9 billion less, as outlined in the company’s 10-K:
Commodity prices have decreased significantly in recent months. Holding all other factors constant, if commodity prices used in our year-end reserve estimates were decreased by $40.00 per Bbl for crude oil and $1.00 per Mcf for natural gas, thereby approximating the pricing environment existing in February 2015, our PV-10 at December 31, 2014 could decrease by approximately $13.8 billion, or 61%.
For its annual report, Continental used a price of $94.99/Bbl to estimate its proved reserves and noted that for every $10 decrease in the price of crude, PV-10 drops by a whopping $3.2 billion.
Of course this backward looking accounting only compounds the problem investors face when attempting to value shale companies. As we’ve noted previously, the industry runs what is effectively a two-tiered bookkeeping system whereby companies can, with impunity, inflate the value of their reserves in order to lure investors while reporting a far lower figure to the SEC.
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The key takeaways here are: 1) when Q1 results start to roll in for E&P companies, we should expect to see massive writedowns across the board as industry balance sheets will no longer benefit from calculating PV-10 based on prices the market hasn’t seen in months, and 2) investors face a virtually insurmountable task when it comes to evaluating E&P companies as management is allowed to make up its own figures in investor presentations while the SEC mandates the use of months’ old prices for the purposes of calculating future cash flow. Fortunately, the SEC is on top of it.
Via Bloomberg:
There are no current plans to revisit or modify SEC reporting rules, Erin Stattel, an SEC spokeswoman, said in an e-mail. She declined to comment further.
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Well of course.
Mark oil to market, but never bank loans, real estate, bonds, pension "assets", tee hee.
How about unfunded government liabilities? When do we mark those to market?
Bingo, Kaiser. I've been watching this and thinking a great opportunity was looming...but I'm in a neutured state of mind.
'inventry to unicorn' accounting
Give a man a gun and he can rob a bank, give a man a bank and he can rob the world.
Unlike company stocks, commodities don't trigger market circuit breakers, so they are allowed to fall as low as they want.
There are circuit breakers in commodities markets too, and they rapidly spill over into other markets.
The history of this is accountants, being over ruled by the lies of politicians and economists.
This too shall pass.
You can have circuit breakers in the CME futures market, but what about the rest of the world and the real spot market? Let's say oil on the CME drops and the circuit breakers go on at $45 and oil futures stop trading in Chicago. Unless Tokyo, London, Paris, Frankfurt, Hong Kong, Shanghai etc all shut their futures markets down, Chicago will simply wake up to what the rest of the world is trading at however many days later. Let's say the entire world shuts down futures trading in oil for a week. The spot price will still determine the futures price when it comes back on. They can't shut down the spot price without stopping the entire world's economy.
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Oh shit...
Chesapeake is a natural gas outfit...not an oil driller per se. (You do get oil when drilling for natural gas.)
Again...those rigs make for great launch platforms for a rocket. SpaceX etc could pick these things up for a song...plus the fuel. Build a small refinery "and off you go."
I'm surprised there's not more comments on this article?
It perfectly summarizes the financial conundrum that the U.S. (small-MidCap cap) oil industry is in.
TGIF cocktail hour, chasing booger, not drilling deals. Don't worry about the critters in the oil patch, there are more Wall Street suckers just waiting for some good ole boy promoter to sell them a deal that they cannot live without.
The Florida Panhandle is infested with the same type critters, they just call themselves real estate developers.
Old article
This is old news. Commodities assets are valued based on the price of the commodity for the first 7-14 days of the year. The oil companies assets are valued as if oil is $95 based on January 2014 prices. For Q1 2015, they have to adjust their assets to January 2015 oil prices of around $45. The same goes for NG as prices have also collapsed there. I still see the oil bulltards touting how XYZ Shale Inc has a book value of $50/shr or whatever. I laugh it off and try to educate the idiots that the BV will be negative when the Q1 earnings come out. What's that going to do to the cost of borrowing when debt rolls? They got 5% bond yields last time because their strong balance sheet. Now their balance sheet looks like crap and they have negative cash flow and declining revenues. Hello 15% bond yields. Interest expense now wipes out all of their income and they have a shitload of deferred tax liabilities headed down the pipeline.
http://www.taxpayer.net/library/article/effective-tax-rates-of-oil-gas-c...
When all of that eventually comes to fruition, it sounds like the entry costs for the next generation of shalers will have been flattened just in time for next ride up in the oil price. Significant E & P has already been demonstrated, so an institution would just need some pocket change to pick up where the pioneers left off. A job ready made for a primary dealer. Make the new hands weak, so the old hands can take. Wash, rinse, etc.
exxon & other 7 sisters will pick up cheap prospects, after all concentration and monopoly is the underlying trend much like tech. can't have a NWO with a bunch of mom and pop and small co 's operating -it makes control more difficult. mega international banks make sure concentration is the way of the economy.
control of money leads directly to mega rich elites and their monopolist co's the last is something we on ZH sometimes forget. they will own everything. like the us housing market, they make it so that renting is the only smart option. get it?
I don't think we are in North Dakota anymore....Toto
Sooo....bearish for the Truck Nutz industry?
Won't see this normalize until there is a lot more bankruptcies.
Reserves, meh. What's the marginal cost of oil extraction of a specific well/field? Just don't give a number, show your work.
Do you understand we're talking about balance sheets here? I have a building that was valued at $1 million. The bank loans me $1 million at a low 4% interest because the building as good collateral. Five years later the loan rolls but my building is now worth $500,000. I don't have the money to pay off the $1 million loan principle. I have to get a new loan for $1 million with only $500,000 as collateral. Do you think I will get the same 4% rate or will it now be 14%? My annual borrowing costs go from $40,000 to $140,000. Now try that for $1 or $10 billion in loans. Just add 3 or 4 zeroes to the borrowing costs. What does that do to earnings and cash flow?
There is no oil analyst which is using $90 USD per barrel in the latest sell-side report.
So ti is a gimmickery yes, but nobody believes it, everyone knows this rule. Move on, nothing to see here.
well obviously the FED will have to jump in and buy all the debt and print another $2 Trillion just to be sure!
nothing prevents oil companies from marking down assets earlier as "Impaired", the
SEC rules set a minimum not a maximum
So even the $33 billion SEC number is inflated, am I reading that right?
Tim Osman and his 40 gangsters will fix the price of oil above $100.
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