Financial Research & Analysis Oil and Gas Accounting Hot Topics 2009 Webcast March 12, 2009 Julie Hilt Hannink
[email protected] + 301.354.9919 Today’s Agenda Commodity Price Drives Impairment Charges Borrowing Bases and Covenant Compliance Modernization of SEC Reserve Disclosure LIFO Repeal and Other US Budget Proposals www.riskmetrics.com 2 Commodity Price Plunge Drove Impairments in 4Q08 Relative lack of impairments and price-related impairment charges over the past 6-7 years due to rising oil prices and decent natural gas price trends. Period end pricing most important for Full Cost (FC) companies as ceiling test charges based on those prices. This will change with new SEC rules as it goes to 12-month average. Although 3Q06 and 4Q06 were problematic on the natural gas price front, improved price by report date meant limited impairments in those quarters. Chart 1: Quarterly Closing Oil and Natural Gas Prices 2001-2008 - Price Plunge Expected to Affect Reserve Estimates and Impairments $160 $16 Oil -WTI $140 Natural Gas - HH $14 $120 $12 $100 $10 Natural gas price average $6.13/mcf $80 $8 North Slope $60 US Lower 48 $6 $40 $4 $20 Oil price average $53.26/bbl $2 $0 $0 1Q01 3Q01 1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 Source: NYMEX, RiskMetrics analysis www.riskmetrics.com 3 Full Cost Ceiling Test Charge Risk Fulfilled Based on high capital spending during the first part of 2009 meant high risk of impairments for companies listed in Chart 2. Significant in the table below are SGY which took $1.3 billion ($850 million AT) impairment charge plus another $466 million in goodwill impairment after spending up for Bois D’Arc and HK which took a $951 million ($600 million AT) impairment charge.