Chevron announced this week it will write down the value of its assets by between $10 and $11 billion in the fourth quarter of this year, according to a report by the Associated Press. The reason for the write-down is oil and natural gas prices that stubbornly refuse to rise despite increases in demand. Those lower prices mean the value of the company’s stated reserves is less than anticipated. More than half the write-down is related to gas drilling operations in Appalachia.
In addition to reducing the stated value of its reserves in the eastern part of America, Chevron is also reducing the valuation of a liquefied gas terminal in British Columbia and other international projects. The company says it is considering all options with regard to those assets, including selling some of them.
Chevron CEO Michael Wirth said in a statement the company must invest in its best assets. “With capital discipline and a conservative outlook comes the responsibility to make the tough choices necessary to deliver higher cash returns to our shareholders over the long term.”
Wirth told CNBC on Wednesday, “We regularly take a look at our long-term outlook for commodity markets. As we do that, we also look at our assets and we evaluate which assets will deliver the highest returns on investment for our shareholders.” Sadly, not destroying the Earth has no value in the cockamamie economic system known as capitalism. That needs to change if humanity has any hope of long term survival.
The company also announced this week there will be no increase in the amount it spends on capital improvements and exploration in 2020. The budget for those items will remain at the current level of $20 billion a year. Chevron says it will focus on operations in the Permian Basin of West Texas and New Mexico, a big project in Kazakhstan, and deepwater drilling opportunities in the Gulf of Mexico.
The irony of all this is that fracking and horizontal drilling techniques have created such a glut of oil and gas that there is no realistic chance that prices will rise any time soon, even though OPEC nations are trying to reduce output to shrink supplies and drive prices higher. Talk about too much of a good thing!
The write-down will trim Chevron’s stock dividend this quarter by about $1.32 a share. Last month, Chevron reported a 36% drop in third quarter profit as a result of lower oil and gas prices and refining margins. It also warned that higher costs of operation would have a negative effect on fourth quarter earnings.
Such write-downs are becoming more commonplace in the industry. Last week, Spanish oil company Repsol took a $5.3 billion write-down of its oil and gas assets as part of its promise to reduce carbon emissions from its operations and products. In late October, BP took a $2.6 billion charge after it sold some US assets as part of a $10 billion divestment plan. The sale brought lower than expected prices, a further indication that the industry may be facing serious financial trouble in the months and years ahead.