North American upstream asset impairments exceed $100 billion in first half of 2020

The value of asset impairments recorded by under-pressure North American upstream producers exceeded $100 billion during the first half of this year, due primarily to pandemic-related drops in oil demand and per-barrel prices.

This dramatic increase in impairments of property, plant and equipment (PPE) is based on an analysis of second quarter financials by Evaluate Energy.

A study of 129 companies (see note 1) illustrates that a further $19.7 billion in impairments was recorded in the second quarter, adding to the sudden $82.4 billion recorded in first quarter results by producers after oil prices crashed in mid-March.

For reference, the same 129 companies only recorded $42 billion in impairments between them in the whole of 2019. $10.8 billion of this total (~26%) came from Chevron alone, related to its Appalachia shale and Big Foot assets in the U.S. and Kitimat LNG in Canada.

Source: Evaluate Energy

A total of 106 companies out of the 129 North American producers recorded at least some PPE impairments in 2020 so far, with 43 of those recording impairments in the second quarter. 27 producers have recorded impairments in excess of $1 billion over the six-month period, compared to only 13 over the whole of 2019.

Source: Evaluate Energy

“This $100 billion in asset impairments is obviously a significant figure and such a drop in asset value is hardly going to endear producers to the market at large when it comes to attracting investment,” said Eoin Coyne, Senior Analyst at Evaluate Energy.

“The timing of the initial sudden price crash meant that Q1 results predictably saw by far the greater levels of PPE impairments. A further 24% increase in these figures after further re-evaluation in Q2, however, shows that things have become even tougher for the 43 companies involved.”

“It remains unclear as to whether any of these impairments will be reversed as 2020 continues. Oil prices did recover to a consistent average of over $40/bbl but have dropped back below this value since the end of August.”

Coyne added: “It is also important to point out that it is just PPE assets we’re talking about here. This first six months of 2020 has also seen major widespread asset write-downs on the exploration and evaluation sides of the industry, massive inventory write-downs and significant levels of goodwill impairments that all have had an impact on balance sheets across the upstream space.”

Evaluate Energy’s financial and operating database allows deeper analysis of all impairments and asset write-downs, as well as other impacts of the demand crash and price downturn, including hedging-related gains and changes in debt. All this information is accessible on an individual company-by-company level and downloadable to Excel.

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1) The 129 companies were made up of U.S. or Canadian-based companies with at least some production in either country. All companies produce over 1,000 boe/d in total and they all recently reported a second quarter report for the three- and six-month period ended June 30, 2020.

Canadian Natural Resources addresses oil weighting with Painted Pony purchase

Canadian Natural Resources Ltd. (CNRL) agreed to acquire Montney-focused Painted Pony Energy Ltd. this week in an all-cash deal worth C$0.69 per share, representing a total value (including debt assumed) of around US$344 million.

This acquisition of Painted Pony will help to re-balance the oil/gas split in CNRL’s portfolio as well as adding almost 200 producing wells, says Evaluate Energy Senior M&A Analyst, Eoin Coyne.

“In 2002, the oil/gas split on a production basis for CNRL was 52% in oil’s favour,” Coyne said. “This increased to reach 79% by Q2 of this year, following a series of large oil-weighted acquisitions. At a time when global events have highlighted the exposure of oil markets to demand shocks, the acquisition of Painted Pony will reduce CNRL’s oil weighting to 76% based on recent quarterly data from each company.”

Coyne also noted that the Painted Pony deal sees CNRL re-enter M&A after a relative hiatus during the first half of 2020. The table below shows the number of net producing wells acquired during the first half of each of the past five years, using analysis of monthly provincial well ownership data available via CanOils Assets. The acquisition of Painted Pony will add 197 producing wells (as per year end 2019 data disclosed by Painted Pony).

Source: Evaluate Energy M&A, via CanOils Assets

This is the second deal in the Montney for over US$100 million this quarter after an extremely quiet start to 2020 in the first six months of the year that only saw $340 million in new deals agreed for Canadian upstream assets. The first deal was an oil-weighted deal that saw ConocoPhillips acquire ~14,000 boe/d from Kelt Exploration for US$375 million in cash and the assumption of $30 million in financing obligations.

Evaluate Energy’s M&A database holds the details on these two deals as well as every upstream M&A deal around the world. Our data also includes deals from other energy sector industries, including renewable power deals. Click here for more information on Evaluate Energy’s global energy M&A database.

Evaluate Energy unveils ESG solutions

Evaluate Energy – the global oil, natural gas and renewables data and analysis business – has unveiled a suite of ESG solutions.

A focus on Environment, Social & Governance considerations is essential for energy companies worldwide. Meeting and exceeding ESG requirements is a prerequisite for new investors, for communities when granting a social license to operate, and for governments pursuing broader emissions reduction targets.

Evaluate Energy has selected a range of ESG consulting partners in Canada to deliver core ESG services. These services are detailed at this link.

Evaluate Energy’s Canadian ESG partners include:

  • Taylor Energy Advisors
  • GLJ
  • Cumulative Effects Environmental Inc.
  • CERI
  • WaterSMART

Pandemic hits global upstream M&A hard in Q2 2020

Evaluate Energy latest M&A report – available for download here – shows that just $4 billion in new deals were agreed in Q2 2020. This represents a 96% drop from an already relatively low total of $21 billion three months earlier in Q1 2020.

This was the first entire quarter to play out under the cloud of the COVID-19 pandemic and the uncertainty surrounding the industry can be seen in low deal values and low deal counts.

Source: Evaluate Energy M&A Review, Q2 2020

The report also shows that $10 billion-worth of deals agreed before Q2 were impacted by the pandemic. These include BP’s exit from Alaska and ConocoPhillips’ exit from Australia. Full details on the major deals affected directly by the pandemic are available in the report, including deals that were cancelled or had terms renegotiated.

The full report, which was released in partnership with Deloitte, is available to download at this link.


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EIA: 40 U.S. producers recorded combined impairments of $48 billion in Q1 2020

The U.S. Energy Information Administration has used Evaluate Energy data to show how 40 U.S. oil and natural gas producers collectively wrote down $48 billion worth of assets in the first quarter. These 40 publicly traded companies collectively produced 6.1 million barrels per day of crude oil and other liquids in the United States, or about 30% of all the U.S. liquids production for the quarter.

The full analysis from the EIA is available here as part of its This Week in Petroleum series.

The impairments represented 22% of the net present value of the 40 companies’ proved reserves as of the end of the previous year, according to the EIA’s analysis.

The data for this analysis, as well as further analysis in the This Week in Petroleum article conducted on capital budgets and credit facility drawdowns, was extracted from Evaluate Energy.

For more on the Evaluate Energy global financial and operating database, click here.


Key findings: North American oil hedging for 2020 and beyond

Below are three key conclusions from Evaluate Energy’s latest report on oil hedging positions for 102 North American producers heading into the second half of 2020.

  • Hedging strategies resulted in around US$15 billion in realized and unrealized commodity hedging gains combined appearing on North America’s upstream company income statements in Q1 2020. Among the companies recording the largest realized gains were Murphy Oil and MEG Energy.
  • Average hedged prices for North American producers in 2020 and 2021 are now just below US$50/bbl for all contract types based on Q1 results, with many averaging around US$45/bbl. This is a decrease of around US$10/bbl for each contract type covered in the Evaluate Energy report since the same analysis was conducted without the addition of Q1 2020 data.
  • Despite this US$10/bbl drop in average prices, the volumes of oil hedged at under US$30 or US$40/bbl – i.e. agreements put in place after the price crashed towards the end of Q1 – is actually very low in relation to all hedged volumes in place, as the chart above shows. Apache Corp. and Centennial Resource Development are among those that hedged significant volumes at sub-US$30 prices.

The full report is available to download at this link.

Evaluate Energy also held a webinar on Q1 hedging results at the start of June. You can watch a full recording of the event at this link.

For some related material, please visit our partners at the Daily Oil Bulletin:


Chesapeake Bankruptcy: Key Insights from 2010-2020 Data

From riding high to bankruptcy, Chesapeake Energy Corporation’s decline will shock many in the industry. Evaluate Energy has tracked Chesapeake’s cash and financing gap over 10 years, showing major spending above and beyond its own earnings earlier this decade.

  • Production grew 69 per cent from 431,000 boe/d to 730,000 boe/d between Q1 2010 and Q4 2014. Growth was financed only in part by organic, operating cash flow, which lagged capital expenditure.
  • Chesapeake spent almost US$30 billion more in capex between 2010 and 2014 (excluding any asset acquisitions) than it generated from operations.
  • The finance gap was covered by asset sales and debt. Over the four-year growth period, operating cash flow was half the combined sum of cash generated.

  • In late 2014, the price crash hit and Chesapeake’s typical sources of cash dried up. New debt became unavailable — the company took on a net sum of zero new debt in 2015 — and asset sales have remained a fraction of the size of pre-2014 cash inflow.
  • Despite the lack of cash generated from asset sales, the company did see its production fall to hit its operating cash flow.
  • Fast-forward to the end of 2019 and Q1 2020, and the growth that took years of heavy investment has disappeared.
  • Q1 2020 production for Chesapeake was 479,000 boe/d, only 11 per cent larger than Q1 2010 and a 34 per cent reduction on the peak production levels seen in Q4 2014. With less operating cash flow, and very little opportunity to take on debt or sell assets like before, Chesapeake’s original debt levels were looming large.

All data here was extracted from Evaluate Energy’s financial and operating database.

For more on Evaluate Energy’s financial and operating database, please click here.

Alternatively, find out about our full product range at this link.

Seismic demand drops will shift oil and gas views on green M&A deals

The seismic shift in energy demand witnessed during COVID-19 is altering the mind-set of oil companies – shifting the motivation for green investment decisions to hard-wired financial gain.

It’s important to note that COVID-19 has impacted the capacity of new project finance and capital expenditure budgets to back new renewable assets coming onstream in the short term.

With the third oil price shock in the past decade, fragile future OPEC support and the ethical investing movement having a tangible affect on oil equities, the argument for diversification by traditional oil and gas producers into renewable energy is hard to ignore.

As global energy demand looks set for fundamental change, government rescue packages like the EU’s €500 billion support for low carbon energy will alter the competitive landscape for renewable energy.

Producers are not pulling back on their climate goals, so, with new future capacity coming on-stream, there could be medium-term appetite to go after green M&A to ensure delivery of energy transition commitments.

Evaluate Energy’s M&A database helps you to keep track of every renewable power and green energy sector deal around the world. 

We expect new entrants into the green industry will need to circumvent significant engineering, regulatory and operational knowledge gaps by buying brownfield assets. Acquiring on-stream renewable assets with existing and proven economics can de-risk an investment compared to entering at the greenfield level. It can also provide the chance to bring in new knowledge and service ecosystems – reducing the steepness of the knowledge curve.

Companies like Royal Dutch Shell, through its North Sea operations, leverage regional service and supply chain efficiency to competitively transition into greenfield renewable asset builds. Many oil and gas companies, however, won’t be as well positioned geographically or as well connected to the required renewable service chain.

Green assets will also remain in direct competition with cut-price oil and gas assets from distressed sellers.

The medium and long term return on investment forecasts will continue to be a prime driver of capital allocation for energy companies. The mandate of companies to return maximum value to shareholders will remain a priority.

For more on our M&A database and the renewable energy sector deals we cover, please click here.

Free Webinar – June 2, 2020: How did hedging impact Q1 results?

Q1 results continue to pour out for North American oil and gas producers, with many recording severe cuts in revenues and impairments to their asset bases thanks to COVID-19 and a lack of demand for oil.

Evaluate Energy will be holding a free webinar on June 2, 2020, focusing on how hedging strategies boosted Q1 results amongst all this turmoil. The webinar will also look ahead, showing how far companies have gone to protect themselves for the rest of 2020.

To find out more about the webinar, click here.

The webinar will build on the early estimates we were able to make from annual filings in our previous webinar that was held on May 6.
Below are some of the pricing statistics we published for that discussion, where we saw that plenty of companies had managed to hedge at over $50 for 2020.

Example Pricing Information for North American Hedging – indexed to WTI (US$/bbl)

Source: May 6 Webinar deck, to be updated for next webinar June 2, 2020

We also showed that based on all contracts or hedging positions in place for 100+ producers according to annual filings and by using WTI and Brent prices as of April 13, we would have expected over $23 billion in hedging gains for 2020 and $27 billion for all periods combined.

Source: May 6 Webinar deck, to be updated for next webinar June 2, 2020

For our next webinar we will be able to go deeper with more concrete information.

The limitation in early May, of course, was that all the data we looked at was made available before the price began to crash. Although the price did not begin to fall until mid-March, plenty of companies have had to adjust their portfolio before Q1 results were released.

Using Q1 data dated March 31 that is now available to us, we can take a better look at how companies began to respond in the immediate wake of the price crashing. This will provide you with a far better indication of:

  • How well protected North America’s oil producers are, should these lower prices stick around for the longer-term.
  • Estimated hedging gains expected in 2020 and beyond.

To sign up for the webinar and to see a full overview of the topics set to be covered, click here.