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Oil Producing Companies’ Impairment Hit $38 Billion in 3Q15

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Oil producing companies

The EIA (U.S. Energy Information Administration) reported that the fall in crude oil prices led to a massive impairment of assets by oil producing companies. What does this mean? It simply means when oil prices fall, the crude oil reserves that are used to extract crude oil have to adjust to fair value. The higher break-even costs and production costs of the US shale oil operators won’t motivate them to extract oil from oil fields whose returns will be much less considering the operational cost and lower oil prices. So, the assets would be written off. This means the assets column in the balance sheet of the major oil companies will be less compared to 2014. It will reduce their borrowing capacity in the already depressed oil market. To learn more, read US oil and gas companies’ debt exceeds $200 billion.

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Impairment of assets in 3Q15 

The EIA reported that global upstream companies’ impairment of assets hits $38 billion in 3Q15. It’s the highest since 2008. The above chart analyzes 48 companies. Shell (RDS.A) wrote down the Canadian oil sands assets because of the high total cost of producing crude oil. So, it’s proved reserves fell by 418 MMbbls (million barrels). Whiting Petroleum (WLL) wrote down some oil fields it bought from Kodiak Oil and Gas. This may continue in 2016 if oil prices trade lower. In the next part of this series, we’ll discuss the revenue and production updates for these companies.

The catastrophic fall in crude oil prices led to a rise in bankruptcy among oil companies. Some upstream oil companies are on the verge of filing for bankruptcy, according to statistics from Forbes. The companies include Swift Energy (SFY), Energy XXI (EXXI), Halcon Resources (HK), and Goodrich Petroleum (GDP). Lower oil prices also led to the lowest profitability among oil producing giants like Chevron (CVX) and ExxonMobil (XOM) in several years. The volatility in the oil and gas market also impacts ETFs like the iShares U.S. Oil Equipment & Services ETF (IEZ), the Vanguard Energy ETF (VDE), and the First Trust Energy AlphaDEX Fund (FXN).

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