Listen as Kym Bolado discusses balance and other topics with special guests Katie Pavlovsky, Duane Dickson, and Scott Sanderson from Deloitte.
Kym Bolado: Tell me a little bit about the impairments and your viewpoints on the future of the energy industry. There’s been a lot of discussion on bankruptcies. So let’s start with that. Tell me what you think we’re going to see.
Scott Sanderson: We did a study to analyze the balance sheet and the carrying costs of a lot of the shale properties and found that there is about $300 billion of assets that would need to be impaired at a $35 oil price. What that really means is the present value of their future cash flows, given a $35 oil price and today’s technology and costs of lifting, would be below the carrying costs of those assets on their balance sheets today. So that’s a pretty significant financial hit that they would take on their statements. Some might argue that’s not really a cash issue, it’s more of an accounting issue. That’s true, but it also would indicate that if they have to write down those assets, that would challenge some of their lending and debt covenants, coverage ratios, and things of that nature, which just puts more stress onto the balance sheet. It’s not really a good time to put more effective leverage on the balance sheet.
Also, nearly a third of the operators are what we call technically insolvent, which is sort of just the accumulation of the cash flows of the assets versus their balance sheet and their overall corporate leverage ratio. Again, that’s a $35 oil price. Of course we’ve seen a bit of a recovery since then, which is a bit of relief. That $300 billion impairment number at $35 a barrel looks more like 240-250 at $40 a barrel. Interestingly, if we can get to the point where we’re closer to $50 a barrel, the health of the companies, their assets and their balance sheets significantly improved. So there is some leverage to the upside oil price. It will help us sustain the shale industry.