To complicate matters further, some US-listed companies use the SEC methodology of the first day-of-the-month price over the preceding 12 months for impairment testing. Some companies have not impaired their assets and are still using end-2019 oil price assumptions as shown in the following table. The companies that have taken an impairment charge have recognized the fall in oil prices – and some have released the oil price assumptions behind the impairment test. So what oil prices were used for the impairment tests? The Brent oil price averaged US$50.3/bbl in Q1 2020, with the price falling from US$67.8/bbl on 1 January to US$26.4/bbl on 31 March. The weighted average write-off was 6% of the booked asset value before impairment. Of the twelve of the mid-tier companies analyzed that impaired their asset values, the total charge was US$7.4bn. Looking first at a selection of mid-tier E&P companies, there is no consistency of approach.Īker BP wrote down the value of its assets while fellow Norwegian player Lundin did not Hess, Murphy, and Noble impaired their assets while fellow US player Talos did not and Colombian E&P companies Gran Tierra and Parex incurred an impairment charge but Canacol did not. So how have companies treated impairment, and what forward oil prices are they using?
If the fair value is less than the balance sheet value, the asset needs to be ‘impaired’ to the calculated fair value.Ī significant fall in oil prices would typically trigger an impairment test, but there is considerable management discretion allowed as to the timing, forward oil prices, and discount rates used. To remind, the value of assets recorded on the balance sheet needs to be tested against their ‘fair’ value (the discounted future value). It also highlights the huge variation in how oil companies are viewing future oil prices so that comparisons of asset values and returns on capital between oil companies are increasingly problematic.Ī review of oil companies that have released Q1 2020 financial results reveals big differences as to whether balance sheet assets have been impaired due to the crash in oil prices. BP’s announcement that it is going to write down the value of its exploration assets by $8-10 billion (56-70%) shows the accounting impact of its energy transition strategy.
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