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Analysts look to other oil majors after Chevron warns of massive Q4 write-down

Chevron Corp.'s massive gas-related write-down for the fourth quarter could be a sign that other large integrated oil and gas majors, including Exxon Mobil Corp., could also announce impairment charges in the coming months, reflecting the overall depressed price environment for natural gas prices, analysts said.

The Chevron write-down, which the company estimated at between $10 billion and $11 billion, was not a surprise to most analysts and is "symptomatic" of the ongoing softness in natural gas prices, Edward Jones senior equity analyst Jennifer Rowland said in a Dec. 11 phone interview.

"I would definitely expect there to be other write-downs following suit," Rowland said, admitting that Exxon could be next in line to announce a charge, possibly one related to its 2010 buyout of shale gas producer XTO Energy Inc.

In the fourth quarter of 2016, Exxon took a roughly $2.0 billion impairment charge on some of the dry gas assets it acquired from XTO, Mizuho analyst Paul Sankey said in a Dec. 11 note. Exxon should now "clear the decks" and write down the "disastrous" XTO deal in full, Sankey said.

Placing a huge bet that natural gas prices would climb, the XTO acquisition cost Exxon about $41 billion, including about $30 billion in Exxon stock plus the assumption of more than $10 billion in XTO debt. As it turned out, Exxon was on the wrong side of the bet. The acquisition was inked at what would prove to be the top of the gas price cycle over the last 10 years.

Since a write-down is the reduction of the book value of an asset or assets, Rowland pondered how much impairment charges will matter to Chevron and potentially Exxon in the end.

"Typically, write-downs are looked through as one-off, not cash," Rowland said. "No one really has lofty expectations for natural gas assets at this point. I would think that the weakness we are seeing in natural gas is pretty much embedded."

Benchmark Henry Hub spot gas prices are set to average about $2.60/MMBtu this year, a level not seen since 1999, and analysts believe ongoing supply growth, particularly out of the prolific Permian Basin, will continue to weigh on prices in the medium and long term. Raymond James analyst Muhammed Ghulam expects Henry Hub gas prices will range between $2/MMBtu and $3/MMBtu for the foreseeable future.

Chevron was not the first major to announce a write-down in the past few months. London-based BP PLC disclosed in October that it would take an after-tax charge of $2 billion to $3 billion in the third quarter, and Norwegian state-controlled Equinor ASA wrote off $2.8 billion in the third quarter — $2.24 billion of which was related to its unconventional onshore assets in North America, "mainly as a result of more cautious price assumptions," the company said.

In early December, Spanish oil and gas major Repsol SA said it expects to write down €4.8 billion, or more than US$5 billion, in 2019 on some of its U.S. assets due to its plan to reach net-zero CO2 emissions by 2050.