French giant oilfield service company Schlumberger announced on Wednesday that it will book a $1.4 billion charge against its 2nd quarter earnings as a part of its global restructuring and head count-reduction plan. Schlumberger’s warning to investors comes on the heels of BP’s caution on Monday that it will book an impairment charge against 2nd quarter earnings of up to $17.5 billion, as the impacts from the COVID-19 pandemic continue to reverberate through all segments of the oil and gas industry.
Lest anyone think that the big independent producers who drill most of the wells in the U.S. might be escaping the need to book similar impairment charges, new data published by analysts at RB Energy LLC this week clarifies that situation. RB Energy monitors the filings of a group of 41 large E&P companies and finds that during the first quarter of 2020 alone they collectively incurred a whopping $59.7 billion in impairment charges. “These impairment charges equated to about 22% of the value of oil and gas reserves reported by the companies at December 31, 2019, and were more than $10 billion higher than total impairments reported in 2017-19, but lower than impairments in 2015,” Nick Cacchione, the founder of Oil & Gas Financial Analytics, LLC, said in a post at RBE’s website.
With the 2nd quarter average price for crude oil projecting to be 35% lower than in the first three months of the year, Cacchione obviously sees more trouble ahead as the tighter cash flows will begin to impact some companies ability to pay salaries and keep the lights on. “Our universe of 41 E&Ps could report pre-tax operating losses totaling about $4 billion and generate just $12 billion-$13 billion of cash flow in the second quarter, less than half the average quarterly cash flow in 2018-19. This level would make it difficult for producers to pay their interest and overhead expenses plus fund current planned capital expenditures of about $38 billion,” he said.
Most of these companies have already cut drilling and capital budgets to the bone, as evidenced by the Enverus Daily Rig Count sliding below the 300 level for the first time this week (it hit 294 on Tuesday). With tens of thousands of layoffs and cost-cutting measures already enacted, the sector doesn’t have a lot more running room ahead.
Many industry observers have anticipated a flood of bankruptcies would hit the upstream sector of the business due to the COVID-19 impacts, but that has not materialized thus far. In its Oil Patch Bankruptcy Monitor report, Haynes and Boone catalogs 18 bankruptcy filings that have taken place among U.S. E&P firms through the first five months of 2020. But, as E&P revenues have crashed along with crude and natural gas prices, the sector’s total debt has continued to rise to a current record total of $132 billion.
While there is some reason for optimism that commodity prices will recover as the year progresses, the cumulative weight of all of this debt…