Time to Drop Devon

• Report this Comment On February 05, 2009, at 5:29 PM, klp12jrm wrote:

  Hi Toby, This $7 billion was an accounting writedown of the book value of their reserves, not a writedown of the amount of their reserves in barrels or bcf's. Their reserves actually increased in volume during 2008. DVN added 584 million barrels equivalent through the drill bit. That means they replaced 2.5 times their annual production of 238 million barrels oil equivalent. It was a non-cash writedown of book value, not a writedown of the volume or quality of their proven oil or gas reserves. DVN just carries these reserves at a lower $ per BCF for NG and a lower $ per barrel for oil. APC uses successful effort accounting and DVN uses a more conservative full cost method of accounting. There are very different ceiling tests between the accounting methods for setting the price of reserves. I do think that you are getting worked up over something that is a non-cash item that does not impact cash flow, cash balances, or debt covenents....and is often an apples and oranges comparison between E&P companies.

• Report this Comment On February 05, 2009, at 6:51 PM, crudengas wrote:

  The price of oil/gas on the last day of 2008 required a lot of companies to write down reserves (simply put, the reserves that would be uneconomic to produce at those prices). What would be more meaningful would be to compare write-downs as a percentage of their reserve base. Some producers are (were) carrying a higher percentage of reserves that can only be produced at higher prices than others. Chesapeake, as you mentioned, has a huge debt load, buying acreage and properties when prices were high and in trends that have smaller margins. Chesapeake is a modern example of what went on in the early '80s and mid-late '90s when companies went hog wild on poor assumptions. The stock traders who forgot about those times LOVED Chesapeake. The rest of us in the industry knew it was just a matter of time before they imploded. They're still way overvalued IMHO w/ all the LNG coming to the States in less than 2 years and competitive down to $3/mcf.

• Report this Comment On February 05, 2009, at 8:04 PM, TexasLonghorns wrote:

  The eviroment we are commenting on actually is the fact no one has factored in natural gas being something that is so undervalued right now that it isn't funny. If the "Great Messiah" is going to get energy independence or even anything approaching a "green" equivalent in place.....natural gas is going to have to be the bridge till our elected "morons"... be it Republican or Democrats figure out what is a bridge from Arab embargos....Hugo Chavez nuts.....Russia....Good Lord America wake up. We send 500 billion dollars a year to people who hate our guts and then everytime one of them attacks the other one...who ya' gonna call.

• Report this Comment On February 06, 2009, at 1:38 AM, XMFSmashy wrote:

  klp-

  I appreciate the comments. Good point on apples and oranges. I'm not convinced, however, that full cost is more conservative than successful efforts accounting. There are proponents of each. I'd be interested to hear why you favor the former. Post here or shoot me an e-mail.

  TS

• Report this Comment On February 06, 2009, at 10:11 AM, klp12jrm wrote:

  Toby, With full cost accounting the ceiling test uses NG and oil 12/31st closing price is establish the value of ones reserves. This price is held constant forever and one projected future cash is discounted 10% per year for the out years. With successful effort accounting and the ceiling tests companies get to project where they think oil prices will be in current and out years to set the book value of their reserves. In regard to ceiling tests, IMO full cost accounting is much more conservative that successful effort in valuing a companies book value of their reserves.

• Report this Comment On February 06, 2009, at 10:23 AM, JakilaTheHun wrote:

  I'm with Smashy on this.

  Saying that it "doesn't affect their operations" is like saying that you could go into work and be just as efficient in your underwear. While there's no reason to doubt that on some abstract level, in reality, if you go into work in your underwear, others' perceptions of you are going to shift dramatically and that's going to change your reality. This is no different.

  Accounting treatments of assets do have a significant impact on how a company is perceived by investors, financors, and the media. While you'd rather see "non-cash" charges than cash losses, to claim it's irrelevant ignores the outside world and the perceptions of others. It also ignores quite a bit about accounting.

  Devon, CHK, and HK all use full cost accounting to value their natural gas properties while APC uses "successful efforts" accounting. Assets are important, even if they are "not cash flows." if you're analyzing a company, you should at least be glancing over their assets. As an investor, I don't think you want those assets to be aggressively valued. I trust APC's accounting more than I do DVN, CHK, and HK because of that.

  I'm not saying that DVN, CHK, and HK are bad companies. Much the contrary. I think at least DVN and HK are very well run. But if they are using aggressive accounting in one area, who is to say they aren't using it in other areas?

  I've been expecting these huge write-downs, but it doesn't shift my opinion and make me believe it's irrelevant.

• Report this Comment On February 06, 2009, at 2:05 PM, XMFSmashy wrote:

  Thanks for commenting, all. I've got some updated thoughts in a piece I just wrote on EOG. Keep your eyes peeled.

  TS

• Report this Comment On February 06, 2009, at 3:28 PM, dividendgrowth wrote:

  Oil will drop to the point where all stupid retail suckers give up.

• Report this Comment On February 09, 2009, at 10:57 AM, botfeeder wrote:

  The article makes little sense to me.

  Oil and natural gas prices have declined precipitously, so oil and natural gas companies need to write down the paper value of their reserves.

  A great big yawning non-issue.

  By the way, if oil and natural gas go up in the coming years, as I expect they will considering the fundamentals, the written off book value will re-materialize.

  What about them planning too much capital spending? The author might have a point there, but a 50% cut in capital spending would seem to indicate that DVN is going a long way in revising its capital spending to reflect the economic downturn.

  I'm buying DVN stock.

• Report this Comment On February 09, 2009, at 11:01 AM, botfeeder wrote:

  To those complaining about the valuation of the assets:

  How in the heck do you "accurately" book natural gas reserves that last year spiked up to what, about $14 per mcf, and now run about $4.80?

  And who cares what they are valued at anyway? With oil and gas companies I consider book value to be a TOTALLY MEANINGLESS parameter.

  Look at their reserves, look at their potential for growing those reserves in coming years, and then factor that into your valuation of what the company is worth.

  Personally, I cannot believe that any informed investor or analyst would consider book value to have any significance when it comes to oil and natural gas producers.

• Report this Comment On February 09, 2009, at 11:02 AM, botfeeder wrote:

  "The Wall Street Journal noted that "[m]ost analysts pay little attention to such charges."

  Well, even though I tend to always say that analysts are idiots, in this case they appear to actually behave in an intelligent manner.

• Report this Comment On February 09, 2009, at 11:04 AM, botfeeder wrote:

  crudengas:

  I find it far fetched that LNG could be economically viable at $3 per mcf.

  Doesn't it cost more than that simply to liquify it, transport it, and convert it back to gas?

Add your comment.