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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: Impairment Charges: The Good, The Bad and The Ugly

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.

SEE: Oil And Gas Industry Primer

Future Impairments
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.

SEE: A Guide To Investing In Oil Markets

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center