We’ve already seen oil and gas companies writing down millions of dollars on their assets as they continue to be hit by the COVID-19 pandemic and now a new analysis suggests those write-downs will grow into hundreds of billions of dollars.
It’s what a new Deloitte analysis suggests as the shale sector enters what it calls a “great compression” which will possibly result in a “deep consolidation” for those companies.
The report shows how depressed oil prices stemming from the COVID-19 pandemic are slated to take a big toll on the sector, which was already struggling with debt and weak cash flow even before the crisis according to Axios.
“Challenging oil market conditions could prompt the shale industry to impair or write-down the value of their assets by as much as $300 billion — with significant impairments expected in Q2 2020,” the report finds.
Devon Energy is one example as the Oklahoma City company reported in April that it experienced a net loss of $1.8 billion which was attributable to $2.8 billion of non-cash impairment charges due to asset evaluations associated with current business conditions.
Continental Resources, another Oklahoma City-based energy company reported property impairments increased to $222.5 million for first quarter 2020, compared to $25.3 million for first quarter 2019.
SandRidge Energy reported $409 million in impairments for all of the 2019 fiscal year. Chaparral Energy had a $71.4 million impairment in the first quarter, according to its announced quarterly results in May of this year.
The Deloitte report notes that 31% of shale operators are “technically insolvent” when U.S. oil prices are at $35 per barrel, while another 20% are “stressed.” Prices are currently in the $39-per-barrel range.
Deloitte says roughly 27% of shale oil-and-gas companies are good acquisition targets for oil majors and large independent producers, while many others would be “superfluous,” or too risky for buyers.
Deloitte analyst Scott Sanderson said in a statement alongside the report that “selective” consolidation can help better position the distressed industry,
“Especially as the energy transition moves forward, investment in big data, advanced digitalization and sustainability measures can be of paramount importance to long-term survival and success,” he said.
Source: Axios