Price Of Oil To Trash Corporate Accounting Valuations

H&P Drilling Rig Midland, TX

Midland, Texas Drilling Rig

Introduction...There is one place where oil is still $95 per barrel.
On Paper.
SEC Rules…The U.S. Securities and Exchange Commission requires drillers to calculate the value of their oil reserves every year using average prices from the first trading days in each of the previous 12 months. Because oil didn’t start its freefall to about $45 till after the OPEC meeting in late November, companies in their latest regulatory filings used $95 a barrel to figure out how much oil they could profitably produce and what it’s worth. Of the 12 days that went into the fourth-quarter average, crude was above $90 a barrel on 10 of them.

Two examples Continental Resources Inc. reported last month that the present value of its oil and gas operations increased 13 percent last year to $22.8 billion. For Devon Energy Corp., a pioneer of hydraulic fracturing, it jumped 31 percent to $27.9 billion.

The real story… This year tells a different story. The average price on the first trading days of January, February and March was $51.28 a barrel. That means a lot of pain — and writedowns — are in store when drillers’ first-quarter numbers are announced in April and May.
The downward valuations drive will continue each quarter throughout 2015 without a oil price increase,

What it means to us… Investment capital for new oil and gas projects will likely get scarcer for the large public companies as the year progresses.  This may open up opportunities for independent oil companies with private capital.

In Conclusion…What should we do while we’re waiting for the production costs and acquisition costs to drop enough to create opportunity at today’s oil and gas pricing?
Keep our capital on the sideline or look for other cash flow projects.

 If you are inclined to venture into fixed price cash flow projects, drop me a note.

Sources: “The Price of Oil Is About to Blow a Hole in Corporate Accounting,” Bloomberg Business by By Jasjylyn Loder, March 3, 2015