While prices for crude oil remain near record highs, many exploration and production companies reported net losses on a GAAP basis during the most recent quarter. These losses were caused by charges related to derivatives pricing, the impairment of properties and other mostly one-time items.
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Range Resources (NYSE:RRC) reported a GAAP loss of $42 million or 26 cents per diluted share in the first quarter of 2012. The largest item that impacted results was a $53 million loss related to the mark to market of the company's hedge portfolio in the quarter. The company also paid a $24 million fee related to a new tax imposed by Pennsylvania on unconventional natural gas wells drilled in the state. After excluding these and several other items, Range Resources reported adjusted net income of $24 million or 15 cents per diluted share.
SandRidge Energy (NYSE:SD) reported a GAAP loss of $232 million or 58 cents per diluted share in the first quarter of 2012. The main culprit for SandRidge Energy was a set of realized and unrealized non-cash losses on the company's derivatives portfolio. After removing these items, as well as several other onetime charges, the company reported adjusted net income of $21.2 million or 4 cents per share.
Quicksilver Resources (NYSE:KWK) also wrote down the value of natural gas properties during the first quarter of 2012 and reported a net loss of $60 million, or 35 cents per diluted share. The impairment charge for the company totaled $63 million, and like other operators was related to the drop in natural gas prices. After adjusting for this impairment and several other one-time items, the company reported adjusted net income of $15 million, or 9 cents per diluted share.
SEE: Impairment Charges: The Good, The Bad and The Ugly
EXCO Resources (NYSE:XCO) reported a GAAP loss of $281.6 million or $1.32 per diluted share in the first quarter of 2012. The proximate cause of the company's large loss was a $276 million non cash write off of natural gas properties it held in its portfolio.
Since Exco Resources employs the full cost method of accounting, it is required to perform a ceiling test on its properties and was obligated to write down these properties due to the low price for natural gas. The company squeezed out a small profit on an adjusted basis, earning $6.7 million or 3 cents per share in the first quarter of 2012.
SEE: Earning Forecasts: A Primer
The Bottom Line
The large difference between reported and adjusted net income for the exploration and production industry demonstrates why the sector is a difficult one for investors to analyze. These one-time items need to be examined to determine whether the company should be adjusting these charges away.
SEE: Understanding The Income Statement
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.