Many exploration and production companies have written down the value of natural gas properties in the first quarter of 2012, as lower prices for the commodity have triggered a revaluation of these assets.
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Apache Corporation (NYSE:APA) has a balanced portfolio of international and domestic oil and gas assets. The company recorded a $521 million pre-tax write down of its Canadian oil and gas properties in the first quarter of 2012. The write down was non cash and came to $390 million or 97 cents per share on an after tax basis.
Apache Corporation uses the full cost method of accounting and is required to compute the value of its proved properties in every country it operates in on a quarterly basis. The company calculates the present value of the after tax cash flows from these properties using a 10% discount rate, and compares this value to the capitalized costs. When the discounted value of the properties is more than the book value, the difference in value is written off. Apache Corporation indicated that if natural gas prices remain depressed, more write downs will occur.
Goodrich Petroleum (NYSE:GDP) reported a $2.7 million impairment expense in the first quarter of 2012, and attributed the expense to falling natural gas prices during the quarter. The expense came to 30 cents per Mcfe and is typically excluded from calculation of adjusted EBITDAX that is reported by exploration and production companies.
WPX Energy (NYSE:WPX) also wrote down the value of natural gas properties in the first quarter of 2012, recording a $52 million non cash charge. This charge was related to the acquisition costs of unproved natural gas reserves. Like Goodrich Petroleum, the company excluded this charge from its EBITDAX calculation.
There has been much market chatter on the question of whether BHP Billiton (NYSE:BHP) will write down the market value of recently purchased natural gas properties.
BHP Billiton made some expensive acquisitions of natural gas properties close to the peak of the market. In February 2011, the company spent $4.75 billion to purchase the Fayetteville Shale assets of Chesapeake Energy (NYSE:CHK), and several months later BHP purchased Petrohawk Energy for $12.1 billion. BHP Billiton has said that this review will be performed on June 30, which is the end of the company's fiscal year.
The Bottom Line
BHP Billiton and others are faced with the cost hangover associated with acquiring and developing natural gas properties in the United States. These impairment charges will most probably continue to haunt the industry as long as prices stay low.
At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.