Exploration

Chevron, Facing Fossil Fuels Glut, Takes $10 Billion Charge

Chevron, Marcellus Shale

Christopher M. Matthews and Rebecca Elliot – Wall Street JournalChevron 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.

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 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.

Chevron Chief Executive Mike Wirth said in an interview that the company had performed well in a difficult market but wanted to focus on its most promising future prospects, including an expansion of shale oil drilling in Texas.

Chevron

 

“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,” Mr. Wirth said.

Chevron’s shares closed up less than a percentage point at $117.90 prior to the announcement Tuesday. Reaction to the news was muted in after-hours trading.

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.

Chevron’s move follows a $5 billion write-down by Spain’s Repsol SA earlier this month and an impairment of $2.6 billion by the U.K.’s BP PLC in October. Industry executives and analysts anticipate that many more oil-and-gas companies will soon write down billions in value to comply with accounting standards because low commodity prices have undermined the economics of many projects.

Many companies are also expected to substantially reduce the value of their oil and gas reserves, figures once seen as essential measures of their long-term security, under separate reporting requirements governed by the Securities and Exchange Commission amid uncertainty over whether the fossil fuels can be cost-effectively extracted. Chevron may restate its reserves to the SEC after any asset sales, a company executive said.

“As the data gets more compelling, they have to face it,” said Myron Boots, co-founder of reservoir engineering consulting firm Buckley & Boots LLC, noting that many wells have failed to live up to expectations.

Exxon Mobil Corp. has written down the value of its U.S. natural gas assets by about $2.5 billion over the last several years, though some analysts have said it should further devalue its largest shale asset, XTO Energy Inc., which it bought for more than $30 billion in 2010. An Exxon spokesman declined to comment on Chevron’s decision Tuesday, noting that it is difficult to compare write-offs across different companies.

Only 20 years ago, the oil-and-gas industry was worried about running out of fossil fuels and scoured the world for reserves. Today, it faces a different problem: too much oil and gas.

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.”

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.

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 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.”

Some of the layoffs are likely to come from the company’s unit in Appalachia. The company is exploring a sale or strategic alternatives for those assets and the Kitimat LNG project in Canada, one of the projects included in the write-down.

Chevron made a big bet on natural gas in 2010, when it acquired Atlas Energy Inc. for $3.2 billion and assumed $1.1 billion of the Appalachian producer’s debt. At the time, gas prices had tumbled 21% to about $4.21 per million British thermal units. Chevron upped its wager in 2011 with more acquisitions in the region through private transactions that analysts valued at about $1.6 billion at the time.

Those bets look misguided today. On Tuesday afternoon, prior to Chevron’s announcement, natural gas prices were roughly $2.26 per MMBtu, up about 1.4% on the day.

Over the past decade, frackers helped release a gusher of gas that has driven down costs for consumers. But the amount of natural gas produced in the U.S. has exceeded U.S. consumption since 2017, Energy Information Administration data show. Gas prices are expected to continue falling, to an average of about $2 per MMBtu, next year, according to analytics firm IHS Markit.

The result has been prolonged hardship for U.S. gas drillers and their investors. That is expected to last well into the next decade, particularly for companies focused on the Appalachian region, which contains much gas but little oil.

Chevron is one of the largest leaseholders in Appalachia but only the 18th largest producer there, according to energy consulting firm Rystad Energy, and has fared better than many of its competitors.

Mr. Wirth said that while some natural gas projects have become uneconomic, the fuel remains an important part of Chevron’s strategy.

“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.”

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