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Big Oil's Big Asset Write Downs: Is More in the Offing?

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ExxonMobil (XOM - Free Report) became the latest supermajor to book billions of dollars of impairments, having substantially overpaid for assets bought during the past decade only to find their price outlooks being hammered.

Oil Majors Record Significant Impairment Charges

The Irving, TX-based company said last week that it expects to take writedowns to the tune of $17 billion to $20 billion this quarter related to several dry gas resources in the United States, western Canada and Argentina.

Prior to ExxonMobil, rival Chevron (CVX - Free Report) — the only energy representative in the 30-stock Dow Jones industrial average — had taken a sizeable charge on its stranded properties not once but twice in quick succession. In the fourth quarter of 2019, the company wrote down $10.4 billion primarily associated with its natural gas operations, while disclosing another $5.2 billion of charge in the second quarter on a coronavirus-driven slide in oil demand and prices.   

The downward revision of sale price and the subsequent writedowns are not confined to the American oil majors only. As a matter of fact, the pandemic forced European energy biggies Royal Dutch Shell (RDS.A - Free Report) and BP plc (BP - Free Report) — both carrying a Zacks Rank #3 (Hold) — to announce massive write offs of up to $22 billion and $17.5 billion, respectively, in the second quarter. For the same three-month period, Italy’s Eni SpA (E - Free Report) decided to write-off roughly €3.5 billion from its non-current assets value following the downward revision of its long-term oil prices. Joining the bandwagon, French multinational TOTAL SE’s (TOT - Free Report) June quarter loss included an $8.1 billion write-down. Even the likes of Equinor (EQNR - Free Report) and Repsol (REPYY - Free Report) had to take non-cash impairment charges to reflect the strong sectoral headwinds.  

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

To put it simply, the ‘Big Oil’ companies as a whole have recorded some very large impairments in the recent past as the macro outlook for energy has soured with crude and natural gas in oversupply amid the pandemic-ravaged demand. This compelled the energy majors to downgrade the value of their holdings to match the weak commodity price assumptions.

Will the Trend Last?

Even as oil prices look to break through the psychologically important $50-a-barrel level on the back of vaccine-related optimism and the OPEC+ deal, there’s no denying that a large chunk of the industry’s assets is only profitable to develop at far higher prices. The story is more of the same for natural gas with most of the shale production deemed unprofitable due to the fuel’s plunging value and terrible economics.

While we might not witness big impairments in the near term on the back of firming prices (especially of oil), it is difficult to imagine some of these assets being developed either, considering the lowered expectation for energy realizations and demand.

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