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Big writedowns in store as gas glut takes effect

Companies are adjusting to adapt to a downturn in prices, write Brian Swint, Edward Klump and Rebecca Penty.

Companies are adjusting to adapt to a downturn in prices, write Brian Swint, Edward Klump and Rebecca Penty.

The record slump in natural gas prices has raised concerns that companies from BHP Billiton to Ultra Petroleum are at risk of writing off billions of dollars of assets following a bubble in US shale gas acreage.

The clearest sign came yesterday, when BG Group and Encana Corp said they were writing down a total of $US3 billion ($2.9 billion) in the value of their gas properties in North America.

"This is not something we are alone in facing as natural gas prices remain low," Sherri Brillon, Encana's chief financial officer, said at a investor meeting last month when she warned of impending impairment charges.

Energy companies have been struggling to adjust to lower prices since a glut in supplies from booming shale production deflated gas futures to a 10-year low this year. Producers have cut gas output, shifted drilling to look for crude and trimmed spending to compensate. Bankers could reduce lines of credit next year for some companies as the value of reserves were diminished by lower prices, said Ted Harper, who helps manage more than $US8 billion for Frost Investment Advisors in Houston.

"There's a myriad of little knock-on effects that come about as a result of these re-determinations and shifts in book value," he said.

Encana, Canada's biggest gas producer, wrote down $US1.7 billion on its North American assets, with $US1.1 billion of that in the US and the rest in Canada. Chief executive Randy Eresman said more writedowns would probably be needed based on expectations for future gas prices.

Gas sank to $US1.902 per million British thermal units in April, down 86 per cent from $US13.694 in 2008 and the lowest price in a decade.

BG Group, Britain's third-largest oil and gas producer, wrote down $US1.3 billion on its US shale fields after cutting its long-term estimate for US benchmark Henry Hub prices to $US4.25 per million Btu from $US5. BG entered its first US shale project in 2009.

"When you have a new price outlook, it's necessary to test your assets against the impairment process," BG's chief executive Frank Chapman said on a conference call. "Our strategy is to create value over a wide range of Henry Hub prices."

Noble Energy, based in Houston, recorded impairment charges of $US73 million on its US assets in the second quarter mainly because of lower prices, the company said in a filing this week. Additional writedowns may be necessary, the company said.

In May, Exco Resources, based in Dallas, reported a $US276 million writedown on its assets, and Quicksilver Resources, based in Fort Worth, wrote down $US63 million.

Also in May, Houston's Ultra Petroleum warned that it might need to take a writedown during the second quarter. It reports earnings on August 2. "We do think that natural gas prices have bottomed and we see a few encouraging signs," chief executive Michael Watford said in a conference call with analysts.

BHP, Norway's Statoil, China's CNOOC and Talisman Energy are among foreign oil and gas companies to buy US shale assets in the past two years.

BHP indicated in May it was considering taking impairments on the value of the US shale gas assets it acquired for $US20 billion last year. BHP bought assets from Chesapeake Energy for $US4.75 billion last year and acquired Petrohawk Energy for $US15.1 billion in August.

Investors have braced for BHP to write down between $US5 billion and $US10 billion of its investment, Peter O'Connor, a Bank of America Merrill Lynch analyst wrote in a May 31 note to clients. The company probably will write down its investment in the Fayetteville Shale gas formation of Arkansas by less than $US2.5 billion, given expected US prices, he estimated.

BHP probably would be able to avoid writing down its purchase of Petrohawk because production from the field it acquired is higher in more valuable oil and natural gas liquids, Mr O'Connor wrote.

The writedowns take a big toll on earnings, said Mike Dunn, an analyst who covers Encana at FirstEnergy Capital. Encana's net loss of

$US1.48 billion in the second quarter was largely driven by the impairment charge. Lower profits at BG, Exxon Mobil and Royal Dutch Shell were driven by declining oil and gas prices.

Impairments in asset values don't affect cash flows that most investors are more concerned about when picking stocks, Mr Dunn said.

Statoil, Exxon and Shell are among companies saying they don't expect to have to write down the value of their properties.

"We're looking constantly at impairment issues," Shell chief executive Peter Voser said in a Bloomberg Television interview. "But so far so good, there's nothing to report."

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