Natural Gas Impairment Charges Pile Up

By Eric Fox | February 28, 2012 AAA

The exploration and production industry continues to rack up non cash impairment charges on natural gas properties as operators write down the value of these fields. The lower value is due to the extended period of low natural gas prices.
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Operators
Magnum Hunter Resources (NYSE:MHR) recorded an impairment charge of $22.9 million, or $0.17 per share in the fourth quarter of 2011. The write down was related to the company's natural gas properties in Kentucky, which were obtained by Magnum Hunter Resources when it acquired NGAS Resources in April 2011.

Berry Petroleum (NYSE:BRY) reported an impairment charge related to the company's natural gas properties in East Texas. This charge along with several other ones reported in the fourth quarter of 2011 led to a net loss of $415 million, or $7.62 per diluted share.

The Petroleum giant makes only a passing reference to these assets in the company's current investment presentation. The properties include approximately 4,700 gross acres and 140 producing wells.

Berry Petroleum reported proved reserves of 19.4 million barrels of oil equivalent (BOE) at the end of 2011. The total would have been higher but the company had to reclassify 20 million BOE of East Texas natural gas reserves from the proved to probable category. (For related reading, see What Determines Oil Prices?)

Bill Barrett (NYSE:BBG) wrote down the value of coal bed methane natural gas assets by $96 million in the fourth quarter of 2011. These properties are located in the Powder River Basin and contained proved reserves of 55.7 Bcfe at the end of 2011.

Barrett has approximately 159,000 gross acres in the Powder River Basin and reported 168 coal bed methane drilling locations left to develop.

Goodrich Petroleum (NYSE:GDP) is shifting towards the development of crude oil and liquid assets but still has significant natural gas assets. The company reported an impairment expense of $6.9 million in the final quarter of 2011 related to natural gas properties in the Beckville field in East Texas.

The company has exposure to the Cotton Valley and Haynesville Shale formations in this field and has allocated no capital towards development here in 2012.

SM Energy (NYSE:SM) also has properties with exposure to the Haynesville Shale, Cotton Valley Sands and other dry gas formations and recorded a non cash charge of $170.5 million in fourth quarter of 2011.

Like other operators, SM Energy has severely reduced dry gas development and expects to spend from $35 million to $40 million on its operated program in the Haynesville Shale in 2012. The company estimates that 80% of its acreage will be held by production by the end of the year.

The Bottom Line
Although impairment charges are non-cash, they do represent the reduced value of natural gas properties that some companies may have paid dearly for, at the peak of development several years ago. The question that investors should ponder is whether companies paying high prices now for crude oil and liquids will be making similiar charges two or three years from now. SEE: Goldman Says To Stick With Oil And Gold.)

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

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