Thursday, December 10, 2015

POOF This is What Falling Oil Prices Are Doing to Oil Company Balance Sheets

From Bloomberg:
In an instant, Chesapeake Energy Corp. will erase the equivalent of 1.1 billion barrels of oil from its books. 
Across the American shale patch, companies are being forced to square their reported oil reserves with hard economic reality. After lobbying for rules that let them claim their vast underground potential at the start of the boom, they must now acknowledge what their investors already know: many prospective wells would lose money with oil hovering below $40 a barrel.
Companies such as Chesapeake, founded by fracking pioneer Aubrey McClendon, pushed the Securities and Exchange Commission for an accounting change in 2009 that made it easier to claim reserves from wells that wouldn’t be drilled for years. Inventories almost doubled and investors poured money into the shale boom, enticed by near-bottomless prospects. 
But the rule has a catch. It requires that the undrilled wells be profitable at a price determined by an SEC formula, and they must be drilled within five years.
Time is up, prices are down, and the rule is about to wipe out billions of barrels of shale drillers’ reserves. The reckoning is coming in the next few months, when the companies report 2015 figures...
The rule change will cut Chesapeake’s inventory by 45 percent, regulatory filings show.


  1. My business is on a marketing list distributed to many auctioneers. I get auction notifications of industrial plants, usually CNC machining oriented, going out of business.

    I've noticed a substantial uptick in auctions out of Texas the last 6 months for companies heavily associated with the oil business. It's a bloodbath for a lot of people. Lot's of dollars in capital equipment going up for sale....most of which is fairly new by the looks of the brochures.

    My guess is they levered up during the oil boom and when the bottom fell out they lost everything. A lot of these guys are in their 60's too....that's pretty hard to recover from at that age.

  2. I work at an independent oil and gas company. In January 2015 when oil hovered around the $60 mark, I transitioned from operations to a new position to report on investments in partners' wells (called non-operated wells). Within the first couple of weeks, I chatted with a reservoir engineer about the PV-10 metric. That is the present value of future reserves discounted by 10% - and using historical commodity prices for the calculation. Now, I'm not an accountant but this raised an eyebrow. So, let me get this straight: to calculate the present value of reserves we're not using the present market price, but instead this historical, fairy tale price of what we could - but never will in 2015 at least - obtain.