Shale writedowns begin as lower prices persist

The record slump in natural-gas prices signals companies from BHP Billiton Ltd. to Ultra Petroleum Corp. are at risk of writing off billions of dollars of assets — including assets in Arkansas’ Fayetteville Shale Play — following a bubble in U.S. shale-gas acreage.

The clearest sign came yesterday, when BG Group Plc and Encana Corp. said they were writing down a total of $3 billion in the value of their gas properties in North America.

“This is not something we are alone in facing as natural- gas prices remain low,” Encana Chief Financial Officer Sherri Brillon said at a June 21 investor meeting when she warned of impending impairment charges.

Energy companies have been struggling to adjust to lower prices since a glut in supplies from booming shale production deflated gas futures to a 10-year low this year.

Producers have cut gas output, shifted drilling to look for crude and curtailed spending to compensate. Bankers may reduce lines of credit in 2013 for some companies as the value of reserves are diminished by lower prices, said Ted Harper, who helps manage more than $8 billion for Frost Investment Advisors in Houston.

“There’s a myriad of little knock-on effects that come about as a result of these re-determinations and shifts in book value,” Harper said.

Encana, Canada’s biggest gas producer, wrote down $1.7 billion on its North American assets, with $1.1 billion of that in the U.S. and the rest in Canada. More writedowns will probably be needed based on expectations for future gas prices, Encana Chief Executive Officer Randy Eresman said in a conference call with investors yesterday (July 25).

DECADE LOW
Gas sank to $1.902 per million British thermal units in April, down 86% from $13.694 in 2008 and the lowest price in a decade.

BG Group, the U.K.’s third-largest oil and gas producer, wrote down $1.3 billion on its U.S. shale fields after cutting its long-term estimate for U.S. benchmark Henry Hub prices to $4.25 per million Btu from $5. BG entered its first U.S. shale project in 2009.

“When you have a new price outlook, it’s necessary to test your assets against the impairment process,” BG CEO Frank Chapman said on a conference call. “Our strategy is to create value over a wide range of Henry Hub prices.”

Noble Energy Inc., based in Houston, recorded impairment charges of $73 million on its U.S. assets in the second quarter mainly because of lower prices, the company said in a filing yesterday. Additional writedowns may be necessary, the company said.

MORE WRITEDOWNS
In May, Exco Resources Inc., based in Dallas, reported a $276 million writedown on its assets, and Quicksilver Resources Inc., based in Fort Worth, Texas, wrote down $63 million. Gas prices averaged $2.49 per million Btu that month.

Also in May, Ultra Petroleum, based in Houston, warned in a conference call that it might need to take a writedown during the second quarter. It reports earnings Aug. 2.

“We do think that natural-gas prices have bottomed and we see a few encouraging signs,” CEO Michael Watford said in a May 3 conference call with analysts.

BHP, Norway’s Statoil ASA, China’s Cnooc Ltd. and Talisman Energy Inc. are among foreign oil and gas companies to buy U.S. shale assets in the past two years.

BHP, Australia’s largest oil and gas producer, indicated in May that it was considering taking impairments on the value of the U.S. shale gas assets it acquired for $20 billion in 2011. BHP bought assets from Chesapeake Energy Corp. for $4.75 billion last year and acquired Petrohawk Energy Corp. for $15.1 billion in August.

FAYETTEVILLE SHALE WRITEDOWN
Investors have been braced for BHP to write down from $5 billion to $10 billion of its investment, Peter O’Connor, a Bank of America Merrill Lynch analyst wrote in a May 31 note to clients. The Australian company probably will write down its investment in the Fayetteville Shale gas formation of Arkansas by less than $2.5 billion, given expected U.S. prices, he estimated.

BHP probably can avoid writing down its purchase of Petrohawk because production from the field it acquired is higher in more valuable oil and natural-gas liquids, O’Connor wrote.

The property writedowns take a big toll on earnings, said Mike Dunn, an analyst who covers Encana at FirstEnergy Capital Corp. in Calgary. Encana’s net loss of $1.48 billion in the second quarter was largely driven by the impairment charge. Lower profits at BG, Exxon Mobil Corp. and Royal Dutch Shell Plc were driven by declining oil and gas prices.

DECLINING PROFITS
Exxon’s profit from U.S. wells tumbled 53% during the second quarter to $678 million, even as its domestic gas output increased 1.4% from a year earlier, the company said in a public filing on July 25.

Impairments in asset values don’t affect cash flows that most investors are more concerned about when picking stocks, Dunn said.

Statoil, Exxon and Shell are among companies saying they’re not expecting to have to write down the value of their properties.

Exxon, which became the largest U.S. gas producer by virtue of its $35 billion acquisition of XTO Energy in 2010, doesn’t expect the current gas slump to prompt any writedowns, David Rosenthal, a spokesman, said during a conference call with analysts yesterday.

Statoil has seen no need to write down the value of its holdings in Pennsylvania’s Marcellus Shale, CFO Torgrim Reitan said in a conference call yesterday.

“We’re looking constantly at impairment issues,” Shell CEO Peter Voser said in a Bloomberg Television interview yesterday. “But so far so good, there’s nothing to report.”