Massive Unprecedented Fossil Fuel Writedown Sweeps Energy Sector

Christopher M. Matthews and Rebecca Elliott have a great report out on the news from Chevron yesterday:

Chevron Corp. is writing down the value of its assets by more than $10 billion, a concession that in an age of abundant oil and gas some of its holdings won’t be profitable anytime soon.

The Wall Street Journal

Chevron is lowering its forecast for future oil and gas prices, and that means it’s assets are worth a lot less than they thought: $10 billion to $11 billion less, to be precise. Chevron will take a $10 billion charge against Q4 earnings as it concedes many of these assets will not be profitable.

In the largest write-down by an energy producer in years, Chevron said Tuesday that it was cutting the value of a number of properties, notably its U.S. shale holdings in Appalachia, by a combined $10 billion to $11 billion. Chevron is also restructuring its operations to focus on fewer prospects in the face of persistently low natural gas prices, and will explore sales of some assets.

The Wall Street Journal

The sustainable energy revolution has just begun, but fossil fuel companies are already starting to feel the burn. With lower prices for oil and gas and excess supply, the future is not looking bright.

Chevron is not alone:

Chevron’s impairment charge is not a company-specific anomaly. Schlumberger took a massive $12.7 billion write down in October, largely due to the slowdown in shale drilling. BP wrote down $2.6 billion in assets in October and Repsol took a $5 billion impairment more recently. Repsol also said that it would try to transform its business, aiming to achieve net-zero emissions by 2050.

OilPrice.com

Companies across the energy sector are facing the exact same issues, stemming from falling commodity prices and an abundance of supply:

The second-largest U.S. oil company lowered its forecast for future commodity prices, and said that as a result, it was reducing the value of production from one of its offshore oil projects in the Gulf of Mexico, called Big Foot. It also lowered the value of a planned facility to export liquefied natural gas from Canada. 

The sobering reappraisal by Chevron, one of the world’s largest and best-performing oil companies, is likely to ripple through the oil-and-gas industry, forcing others to publicly reassess the value of their holdings in the face of a global supply glut and growing investor concerns about the long-term future of fossil fuels. Particular pressure is falling on shale producers, especially those focused on natural gas in places like Pennsylvania, which are struggling with historically low U.S. prices caused by oversupply.

The Wall Street Journal

Wow, this is truly amazing to read. We all knew it would happen someday, but it’s amazing to read about investors concerned about whether fossil fuels have a future.

(Hint: Long term, they don’t)

An abundance of discoveries over the last decade, particularly the flood of oil and gas unlocked by the U.S. shale boom, has led to consistently low commodity prices and eaten into fossil fuel companies’ profits. The techniques behind the boom, horizontal drilling and hydraulic fracturing, have upended global markets, Mr. Wirth said.

“They have truly transformed the market mind-set from one of scarcity to one of abundance,” he said. “It’s the story of our industry.”

The Wall Street Journal

This sounds absolutely terrible for the Earth. Maybe we need some more restrictions on fracking –– then the energy companies won’t have to worry as much about low commodity prices.

Russia and OPEC have been curtailing oil production for years to put a floor under global prices and agreed last week to further cuts of 500,000 barrels a day until the end of March. Still, oil companies have struggled to reap the profits of old and are falling out of favor with investors amid fears that electric vehicles and renewable energy, along with government regulations to address a warming planet, will constrain their futures. Oil-and-gas companies now make up about 4% of the S&P 500 index, down from roughly 10% a decade ago, FactSet data show.

The Wall Street Journal

Wow, that is a truly astounding figure. Oil and gas companies are now only 40% as large a part of the stock market as they were a decade ago. I would never have guessed that electric vehicles and other factors would hit their valuations so hard so fast –– these companies are still extremely profitable. That’s the thing about the stock market: It’s concerned with the future, not the present or the past.

Amid the changing landscape, Chevron has pulled back on its global footprint. It now operates in around 18 countries, according to the company, down from nearly 40 earlier this decade. Mr. Wirth said Chevron must be selective about its investments moving forward, focusing on oil-rich regions like the Permian Basin in West Texas and New Mexico.

The Wall Street Journal

The oil companies are shrinking.

The company is also undertaking a restructuring, going from four global production units to three. “Companies that wait until change is forced upon them fail,” Mr. Wirth said in a video sent to employees last week. “We’re not going to let that happen at Chevron.”

The Wall Street Journal

“Wait, who said anything about failing? We’re going to fail? We’re already restructuring?!” –– Chevron Employees

“The world runs on oil and gas today and any energy transition will take time,” Mr. Wirth said. “Our commitment is to be a responsible provider of that oil and gas.”

The Wall Street Journal

Well, it better take time. Because so far it doesn’t look like the energy sector has a Plan B.

We’ve never seen anything like this before: A massive writedown of assets is sweeping the fossil fuel industry.

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4 thoughts on “Massive Unprecedented Fossil Fuel Writedown Sweeps Energy Sector

  1. I wouldn’t say they don’t have a plan B… Most energy companies are increasingly investing in renewable assets.

    The question is, does that actually make sense? Knowing their traditional market is going away, these companies are faced with a choice: gradually winding down their operations; or trying to shift to new markets. For psychological reasons, people running a company will pretty much always prefer trying to keep the company going — but it’s not clear that this is actually the rational path. Investors believing in the legacy assets will be dismayed by dilution of profits; while investors believing in the emerging assets will generally prefer to invest in pure-play disruptors…

    That leaves agnostic investors, who are not sure whether the transition will happen quickly or slowly (or not at all), and want to hedge for each possibility. For those, a company having both legacy and emerging assets might seem attractive… I’m not sure though whether it isn’t preferable for such investors to explicitly hedge their bets by investing in pure-play fossil companies along with pure-play renewable companies?

  2. While there is little doubt that renewables are affecting fossil fuel assets, I’m not sure they actually have much of an impact on the value of shale oil assets specifically…

    Ignoring occasional temporary shortages due to imbalances in supply vs. demand, oil has been abundant pretty much forever. Prices have been upheld by artificially constraining supply for at least half a century. It’s only these artificially inflated prices that ever made shale oil assets appear kinda profitable — though from what I have read elsewhere, the dirty truth is that they never *really* were…

    Indeed it makes perfect sense for low-cost producers to limit supply just enough so that “alternative” assets such as shale oil are *almost* profitable: that way they can get the highest price possible without facing serious competition from the higher-cost assets…

    The fact that supply is actually abundant, and only artificially limited to match demand, means that reduced demand from renewable competition actually should have limited effect on prices. (Though obviously it does affect revenues…)

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