Southwestern Energy Company (SWN), Chesapeake Energy Corporation (CHK): One Factor That Crushed Natural Gas Stocks in 2012

Page 1 of 2

The slump in natural gas prices last year hit more than just producers’ earnings. Because of how companies are required to record reserves, impairments due to the collapse in natural gas prices caused earnings at the top 50 oil and gas reserve holders to drop by $26.4 billion in 2012. This highlights the importance of looking beyond just the top and bottom lines to get an adequate gauge of a company’s performance.

Price movements are completely out of a company’s control (unless all were secretly working together, of course), so taking these impairments into consideration is a must. That’s why it’s important to drill down a little deeper into these charges to see if last year’s could be hiding upside if natural gas prices move higher in the future. Let’s look at five companies that logged large natural gas impairment charges last year which really clouded overall profitability.

Southwestern Energy Company (NYSE:SWN)

Southwestern Energy Company (NYSE:SWN)
If you didn’t look close enough, you might miss the fact that Southwestern Energy’s business isn’t as bad as the numbers made it look last year. The company wrote down $2.97 billion in proved oil and gas properties due to the low price of natural gas. That caused the company to report losses per share of $14.24. However, when you strip those and other charges out, the company actually produced operating cash flow of $713 million and earnings of $2.15 per share. It goes to show you, when investing in oil and gas companies you need to look past the headline numbers before passing judgment on a company because these reserves could be added back on the books if gas prices spike.

Chesapeake Energy Corporation (NYSE:CHK)
The past few years haven’t been kind to the nation’s No. 2 natural gas producer. The low natural gas prices last year were especially tough as it forced the company to book a $2.022 billion impairment charge on several of its natural gas and oil properties. When you look at the company’s headline financial number you’ll see that it reported a loss of $940 million, however, when you back out items like these impairment charges the company actually produced operating cash flow of $1.146 billion last year. This is just one of the many cases where natural gas impairment charges made the bottom line of a producer appear to be much worse that it was in reality.

Source: Chesapeake Energy

EOG Resources Inc (NYSE:EOG)
Last year natural gas wasn’t kind to EOG – the company recorded a $849.4 million impairment charge in the fourth quarter on certain of its Canadian natural gas assets. On top of that, according to the company, “total company net proved undeveloped reserves decreased 15% year-over-year due to low natural gas prices in 2012 that caused essentially all of the previously booked proved undeveloped reserves in EOG’s North American dry gas properties to be written off.” While this cost the company $1.27 billion in impairment charges, as these are non-cash charges it didn’t affect the company’s cash flow. Further, if drilling for gas at these properties proves profitable in the future, the reserves can be added back.

Pioneer Natural Resources Resources (NYSE:PXD)
Earnings at Pioneer were weighed down in the fourth quarter of last year by a $101 million non-cash impairment charge relating to its natural gas assets in the Barnett Shale. Earnings for that quarter were just $29 million; however, when you strip out that impairment charge as well as other one-time items in the quarter, earnings were $107 million. As you can see, these asset impairment charges can significantly distort earnings which is why you need to look at the complete picture. Overall, the effect of impairment for the year totaled $532.6 million at Pioneer thanks to several write-downs of its Barnett dry-gas properties in Texas.

Linn Energy LLC (NASDAQ:LINE)
Last year LINN was able to boost its oil and gas reserves by 42% from 3.4 Tcfe to 4.8 Tcfe through a combination of savvy deals and its drilling program. Reserves, however, could have grown even more if it weren’t for the 803 Bfce of proved reserves that came off the books last year. This cost the company $422 million in impairment charges and caused LINN to report a net operating loss. Only 340 Bfce of those reserves were cut from the books due to poor asset performance and are likely lost forever. The rest of the reserves were either impaired due to the SEC’s five-year-development limitation on proved undeveloped reserves or came off the books due to low natural gas prices. If natural gas prices move higher these reserves could become economically viable and turn once again into assets for the company.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

Top 6 Cities For The Ultra Rich to Live in Comfort

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!