FILE PHOTO: Oil pumping gear, also known as 'nodding donkeys,' operate at the Mamontovskoye oil field, operated by Yukos Oil Co., in the Khanty-Mansi region of Russia, on Friday, December 17, 2004. Former majority owners of Yukos Oil Co. said they won a landmark $50 billion award against Russia for the confiscation of what was once the nation's largest oil company. Photographer: Dmitry Beliakov/Bloomberg
FILE PHOTO: Oil pumping gear, also known as 'nodding donkeys,' operate at the Mamontovskoye oil field, operated by Yukos Oil Co., in the Khanty-Mansi region of Russia, on Friday, December 17, 2004. Former majority owners of Yukos Oil Co. said they won a landmark $50 billion award against Russia for the confiscation of what was once the nation's largest oil company. Photographer: Dmitry Beliakov/Bloomberg

Analysis: Falling oil prices to trigger flood of write-downs

By Bloomberg Time of article published Jan 12, 2015

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Joe Carroll and Tara Patel

TUMBLING crude prices will trigger a flood of oilfield write-downs starting this month after industry returns slumped to a 16-year low, calling into question half a decade of exploration.

With crude prices down more than 50 percent from their 2014 peak, fields as far-flung as Kazakhstan and Australia are no longer worth pumping, says a team of Citigroup analysts led by Alastair Syme. Firms on the hook for risky, high-cost projects that do not make sense in a $50-a-barrel (R587) market include international titans such as Royal Dutch Shell and small wildcatters like Sanchez Energy.

The impending write-downs represent the latest blow to an industry rocked by a combination of faltering demand growth and booming supplies from North American shale fields.

Earnings threatened

The downturn threatens to wipe out more than $1.6 trillion in earnings for producing firms and nations this year.

Oil explorers are already cancelling drilling plans and laying off crews to conserve cash needed to cover dividend checks to investors and pay back debts.

“The mid-cap and small-cap operators are going to be hardest hit because this is all driven by their cost to produce,” said Gianna Bern, the founder of Brookshire Advisory and Research, who also teaches international finance at the University of Notre Dame.

An index of 43 US oil and gas companies lost about one-fourth of its value since crude began its descent from last year’s intraday high of $107.73 a barrel on June 20. The price dipped below $50 on Monday, the lowest since April 2009.

The decline represented a $4.4 billion drop in daily revenue for oil producers, which equated to $1.6 trillion on an annualised basis, Citigroup researchers led by Edward Morse said in a note to clients.

The stocks of oil and gas producers fell for a second day in Europe. Eni, Italy’s largest energy company, dropped as much as 1.9 percent to e13.12 (R184) in Milan trading after crashing 8.4 percent on Monday. Royal Dutch Shell, the region’s largest oil producer, fell as much as 1.6 percent.

The oil market rout was exposing projects dating as far back as 2009 that were either poorly executed or bad ideas to begin with, Syme’s team said in a note to clients.

The biggest strip of asset write-downs probably would happen among US explorers such as Sanchez, Matador Resources and Clayton Williams Energy that did not have the same financial discipline as bigger producers such as Marathon Oil, Bern said.

The write-downs that occur would be in the form of asset impairment charges related to the declining worth of specific oilfields, rather than wholesale reductions in proved reserves. – Bloomberg

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