Sustained Low Natural Gas Prices Causing Industry to Examine Long-Term Profitability

Chevron Corporation announced last week that it would be writing down the value of its oil and gas assets by more than $10 billion. The company said the impairment was related to its shale holdings in Appalachia and long-term expectations about natural gas prices. Last month, Equitrans Midstream Corporation disclosed that its YTD operating performance was affected by nearly $300 million in impairment charges recorded as a result of downward revisions to forecasted natural gas production growth in the region.

Industry analysts don’t expect pricing to pick up in the foreseeable future. Conventional wisdom held for years has been that production companies can plug wells and pause production to wait out low prices. Some in the industry are considering the possibility that buyers may never come, as the world considers the impact of fossil fuels on climate change and innovations that reduce the need for oil and natural gas are adopted. Suppliers who worry that prices may never rebound are selling reserves while they can, which is also keeping downward pressure on pricing.

With sustained depressed pricing for natural gas, and no increase expected on the horizon, exploration & production and midstream companies in the region will need to take a hard look at their oil and gas assets to determine if impairment charges are necessary. Expect other players to announce similar reassessments as the fact that these companies are writing down the value of their assets may itself represent an indicator of impairment for the rest of the industry. Smaller, independent producers with undiversified exposure to local natural gas pricing may also need to consider the impact on their long-term profitability and their ability to continue as a going concern.

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Sources:

https://www.wsj.com/articles/chevron-facing-fossil-fuels-glut-takes-10-billion-charge-11576012579

https://www.businesswire.com/news/home/20191105005457/en/ETRN-EQM-Announce-Quarter-2019-Results