Energy Company Impairment Charges Down in U.S.

Canada appears likely to follow the same decline. But the oil sands is a wild card

February 16, 2017

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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 has recently recorded US$2 billion in impairments for Q4 2016, signalling a significant change in accounting policy. The impairments were mainly associated to undeveloped natural gas positions in its Rocky Mountains region. This $2 billion impairment charge is one the U.S. oil and gas industry’s largest in 2016.

Through the first nine months of 2016, the largest impairment was recorded by Devon Energy Corp. The company 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.

Mark Young is a senior oil and gas analyst with Evaluate Energy and CanOils.

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