Is Chevron's $11B Write-Down an Oilpatch Warning?

[thackney]

Is Chevron's $11B Write-Down an Oilpatch Warning?
https://www.rigzone.com/news/is_chevrons_11b_writedown_an_oilpatch_warning-14-jan-2020-160788-article/

In December 2019, American oil major Chevron announced a major write-down of some $11 billion in the value of its assets, including its gas holdings in the Appalachia region, a deep-water Gulf of Mexico project and its proposed Kitimat LNG export project in British Columbia. In fact, Chevron’s Appalachian shale projects contributed to more than half of a massive impairment charge that the company reported for the last quarter.

This write-down is in response to Chevron’s own long-term forecast for oil and gas prices, which predicted much lower energy prices than previously. In December Chevron Chief Executive Mike Wirth in an interview with the Wall Street Journal said: “We have to make the tough choices to high-grade our portfolio and invest in the highest-return projects in the world we see ahead of us; and that’s a different world than the one that lies behind us.”

Decision makers at Chevron have realized the company is facing a market surplus in both oil and gas worldwide, which is impacting profit margins. As a result of such factors, it is becoming increasingly difficult to justify investment in large gas fracking projects, especially with the prospect of slowing demand. Is it time to change the industry’s exploration strategy to more profitable targets?

It is likely that this California-based oil major will not be alone amongst oil companies announcing that their holdings in terms of market value are likely to be worth significantly less than previously estimated. This is because of current market conditions that are resulting in many American fracking projects failing to break even, and fluctuating public/investor concerns about the long-term future of the industry....

[Smokin Joe]

WHile market conditions are impacting break-even curves and production estimates, I would postulate that the final and more stable end of the decline curve on tight gas/oil and shale plays isthe determinate factor as to whether payout is on the horizon, or whether each succeeding well paid the tab for the previous well. If the latter, and sustained production was insufficient after initial decline to reach payout at the lower price point, some companies could face serious shortfalls in revenue. I think this, as much as any surplus, has dampened demand for new drilling and completions except in the very best parts of the best plays. With relative lack of hostility, money is returning to offshore plays where potential payout is higher yet, even though they are more expensive to drill and complete.

[IsailedawayfromFR]

WHile market conditions are impacting break-even curves and production estimates, I would postulate that the final and more stable end of the decline curve on tight gas/oil and shale plays isthe determinate factor as to whether payout is on the horizon, or whether each succeeding well paid the tab for the previous well. If the latter, and sustained production was insufficient after initial decline to reach payout at the lower price point, some companies could face serious shortfalls in revenue. I think this, as much as any surplus, has dampened demand for new drilling and completions except in the very best parts of the best plays. With relative lack of hostility, money is returning to offshore plays where potential payout is higher yet, even though they are more expensive to drill and complete.

A lot of good thinking there and certainly does bring to mind the need for sustainability in any play, particularly the wild and what I still refer to as relatively new world of unconventionals.

I know Chevron overpaid for the company it purchased in the Marcellus so that was likely an issue in addition to anything related to well declines there.

In all, Chevron is not quite so dependent upon unconventionals as others so your remarks are more pertinent to some other companies I know that are in fact are.(Continental and Whiting for example).