As earnings reports have come out this year, many companies have marked down the values of their properties -- especially those that have high debt loads like Continental Resources (CLR). So, what makes Continental so special?
In this video segment, Sean O'Reilly, Taylor Muckerman, and Tyler Crowe consider a few of the possible reasons that the company didn't write down its property values this past quarter, and why there's probably nothing fishy about it.
A transcript follows the video.
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This podcast was recorded on March 3, 2016.
Sean O'Reilly: We've got a mailbag question from Carl in Virginia Beach, who writes, "In recent quarters, we have seen some oil and gas companies write down the value of their properties, and some have not. One company that has not is Continental Resources." Speak of the devil. "They have a huge debt load as well. Are they being honest by not writing down their properties? Sincerely, Carl."
Taylor Muckerman: I was just laughing at Billy Madison.
O'Reilly: Sincerely?
Muckerman: "Carl. Nice to see you!" About writing down assets, that's a tricky game with oil prices fluctuating like they are. It's a pretty company-dependent thing. As a shareholder, obviously you're going to want to have your own opinion about how these companies are handling their assets, and especially with oil and gas companies, because asset values do fluctuate pretty frequently, and Continental Resources has been, I guess, maybe one of the more bullish companies in terms of the speed of the turnaround they expect. Maybe they're not as quick to write off their assets because they think it's going to turn around, but if it doesn't, they could see those writedowns a little bit later than most and catch people off guard.
Tyler Crowe: There are certainly some accounting things that can go on when it comes to oil and gas for valuing properties, but there are some rules that are applied there. They're normally done by an independent ratings agency or an evaluation company that looks at their properties and says, "This is economical at such and such a price." At their most recent 10-K, it said that the price that they were going on was $50 a barrel, which was the trailing 12 months of 2015, which is standard SEC protocol, so we can't really knock them for not going at SEC protocol.
It doesn't seem like they're really doing any trickery, based on the current accounting. They brought on some new reserves that they actually -- because of cost-cutting and better economics -- they were actually able to add some stuff that was what they would call technically recoverable, but now it's economically recoverable, that helped to replace the existing reserves. When you add all those things together, it doesn't look like they're really hiding things in comparison to some other people. And also, let's take into account, over the past two years, they have written down $1 billion worth of their asset properties. Maybe they just didn't do it this particular quarter.
