Oil giants to meet the peak of asset impairment

The novel coronavirus pneumonia caused the low price of crude oil in 2020, which brought great impact to the global energy market. The oil industry has carried out a larger asset value adjustment in ten years. In 2020, ExxonMobil, Chevron, shell, total, BP ConocoPhillips will write down nearly $80 billion of assets.

Asset impairment is the requirement of accounting standards, which reflects the recognition of asset value. China's three major oil companies are facing the same challenges in assessing the value of oil gas assets, judging the signs of oil gas assets impairment controlling the impairment of oil gas assets.

The significance regulations of 01 impairment

When there are signs of asset impairment, we should test the risk of asset impairment; If the actual value of the asset is lower than the book value, it is necessary to calculate the impairment of the asset. The actual value of assets generally adopts the expected future cash flow of assets, whether it is discounted depends on the accounting standards. In the calculation of the future cash flow of assets, the technical economic parameters are predicted values, which reflect the planning expectation of the enterprise for the remaining service life of assets.

Asset impairment is a double-edged sword. In the short run, the provision of asset impairment will reduce the current profit, which may cause continuous loss of assets damage the confidence of stakeholders the market; In the long run, asset impairment reduces the basis of future asset depreciation, depletion amortization, which is conducive to reducing future costs improving long-term financial performance. Therefore, the impairment of assets reflects the attitude of enterprises towards assets, also reflects the judgment of enterprises on the future development trend of the industry.

Oil gas assets are the core assets of oil companies. In the impairment risk test, the oil production plant ( oilfield block) is usually taken as the minimum cash generating unit. The main parameters affecting the real value of oil gas assets include the predicted values of oil price, reserves, production, operating cost investment. Besides the rights interests of unproved mining areas, oil gas assets should be inspected regularly. When the following three signs of impairment are found, the risk of impairment of oil gas assets should be tested: 1) oil gas prices continue to fall there is no expectation of future rise; ② The actual future development cost of the asset exceeds the expectation; ③ The estimation of oil gas reserves of assets has been greatly reduced. For the rights interests of unproved mining areas held by enterprises, whether there are signs of impairment , the impairment test should be carried out at the end of each year.

Different oil companies follow different accounting standards because of their different places of registration listing. BP, shell total mainly follow the international financial reporting standards; ExxonMobil, Chevron ConocoPhillips mainly implement American accounting standards; The three major oil companies in China recognize adopt the relevant provisions of international financial reporting standards Chinese accounting standards. The main differences among the three accounting standards are as follows: 1. After the impairment of long-term fixed assets, the international accounting standards allow the reversal, but China the United States do allow it; In order to reduce the difference of financial reporting system, the three major oil companies in China are treated as the impairment can be reversed. ② The international Chinese accounting standards adopt the present value of the future cash flow of assets, the United States does discount it.

Management practice of 02 international company

The most direct main reason for international oil companies to implement large-scale asset impairment is the collapse of international oil prices low operation. In the past decade, international oil companies have carried out two rounds of large-scale asset impairment, one in 2014-2016, the other in 2020. Both of them are due to the sharp drop of oil price, which leads to the reduction of the expectation of future oil price, so as to implement asset impairment. Generally speaking, the timing extent of asset impairment are only affected by accounting standards, but also reflect the current situation of the company's operation, the judgment of the future development trend of the industry, the understanding of asset value the preference for business risk. The better the operating efficiency cash flow are, the stronger the risk tolerance is, the more attention is paid to asset preservation, the more optimistic the future development trend of the industry is, the more likely the enterprises are to devalue later, less no devaluation. Asset impairment of international oil companies 2014 to 2016 in the middle of 2014, international oil prices ended the high volatility market began to fall sharply. The average price of Brent crude oil futures dropped sharply US $99.5/barrel to US $45.1/barrel in 2016, a decrease of 54.6%. Affected by the decline in oil prices, the value of reserves of oil companies has decreased significantly, the expected income has decreased accordingly. International oil companies have generally made provision for high asset impairment. As different accounting standards have different provisions on whether asset impairment can be reversed, European oil companies are more active in asset impairment, while American oil companies tend to be more conservative in asset impairment. Among them, BP increased the provision for asset impairment in 2014, shell total conducted large-scale asset impairment in 2014 2015, ConocoPhillips conducted high asset impairment in 2015, Chevron conducted high asset impairment in 2015 2016, ExxonMobil conducted asset impairment in 2016. It is worth noting that ExxonMobil has long adhered to the principle of less no impairment of assets, did take asset write down measures in 2014 2015. The main reasons include: good operating conditions, low production operation costs, high profitability sufficient cash flow; They are optimistic about the future development trend of the industry; It is intended to avoid continuous loss of assets. Due to asset write down financial problems, ExxonMobil was investigated by the securities Exchange Commission (SEC) in September 2016. Under pressure, ExxonMobil made provision for asset impairment (before tax) of US $2027 million, US $1521 million US $489 million in 2016, 2017 2018 respectively. The SEC abandoned the investigation in March 2018. ExxonMobil increased its impairment rate again until 2020, when oil prices plummeted. Like the United States, China's accounting standards also stipulate that the impairment of assets is irreversible. Due to the better operation more emphasis on the value maintenance appreciation of assets, China's oil companies have implemented the large amount of asset impairment relatively late. PetroChina has made high amount of asset impairment reserves in 2015 2016, while Sinopec CNOOC have increased the extent of asset impairment mainly in 2016. Among them, the impairment of CNOOC's accrued assets is less, the impaired assets are mainly Canadian oil sands.

In 2020, the impairment of assets of International Petroleum Company in 2020, influenced by the global game of COVID-19 the game between oil producing countries, the international crude oil price was very intense. The average price of Brent crude oil futures was 41.4 US dollars / barrel, which was 35.2% lower than that in 2019. Affected by the drop in oil prices, the operating revenue of international oil companies has generally declined by about 30%. Even though all the companies have taken measures to cut operating expenses, the decline in cost is less than that in operating revenue, the profit has dropped significantly. Compared with 2019, the performance of international oil companies in 2020 has only declined significantly, but also reversed fundamentally, all of which have changed profit to loss, the loss is huge. Among them, ExxonMobil, shell BP all suffered losses of more than $20 billion, while other companies suffered losses of about $5 billion. In 2020, international oil companies are withdrawing huge amounts of oil gas assets impairment. According to the financial reports of the fourth quarter of 2020 released by international oil companies, shell has an annual book loss of US $21.9 billion, the pre tax impairment of assets is as high as US $28.1 billion. The main impairment assets are Curtis LNG prelude flng in Australia, offshore oil gas in the Gulf of Mexico, Brazil, Nigeria Europe in the United States, unconventional oil gas in North America. ExxonMobil's annual book loss is as high as US $22.4 billion, its pre tax asset impairment is US $20.06 billion, mainly involving natural gas assets in the United States, western Canada Argentina. BP's annual book loss is US $20.3 billion, its pre tax asset impairment is about US $14.6 billion. The impairment mainly involves oil gas assets of Azerbaijan, BPX energy, Canada, India, Mauritania Senegal, North Sea, Trinidad Tobago. Total's annual book loss is 7.3 billion US dollars, the pre tax asset impairment is 8.5 billion US dollars, mainly due to the Canadian oil sands project impairment of about 7 billion US dollars. Chevron's annual book loss is US $5.5 billion, its pre tax asset impairment is US $5.7 billion, mainly involving oil gas assets in the United States, Australia Venezuela. ConocoPhillips had a Book loss of US $2.7 billion, its pre tax asset impairment was US $800 million. The impaired assets were mainly unconventional oil gas in the United States.

Comparison of the difference between two devaluations

First, the intensity of impairment is different, exposing the current operating difficulties.

In the process of market adjustment 2014 to 2016, although the international oil price dropped by about 55%, much higher than that in 2020, the decline of oil price a historical high to a medium low mainly resulted in the decrease of profit margin of oil gas industry. Generally speaking, the operating conditions of International oil companies were substantially affected, they still had relatively stable cash flow. Although the profitability of oil companies declined, However, there are few losses they still have strong survival ability. Six international oil companies have written down about $60 billion in assets in three years. 2020 is considered by many industry experts to be the most difficult year in the history of the oil industry. Although the year-on-year decrease in oil price is about 35%, the impact of the sharp drop in oil price on oil companies is far greater than that of 2014-2016, oil companies are generally faced with high losses. For oil companies, the bigger problem behind the loss is the trust crisis brought by the loss to investors. In addition, the credit rating of major oil companies may face a downgrade, which may increase their borrowing costs make the financing of large projects more difficult. In the process of dealing with low oil prices, international oil companies have taken positive measures to ensure cash flow improve future benefits, such as ensuring stable production increasing production, actively reducing costs increasing efficiency, improving investment efficiency stripping inefficient assets. At the same time, low oil prices caused by COVID-19 triggered a major asset value adjustment in the oil industry for at least 10 years, 6 international oil companies reduced assets in 2020 by about US $80 billion.

Second, the judgment of future industry prospects has changed fundamentally, the pace of energy transformation has accelerated.

The strength of asset divestiture impairment reflects the fundamental changes in the judgment of major oil companies on the future prospects of the market. After the oil price plummeted 2014 to 2016, the main judgments of oil companies on the industry are as follows: the price of Brent crude oil will remain at the level of US $50 to US $60 / barrel for a long time, the oil industry will shift a high profit operation to a new normal operation with low profit margin. After the low oil price in 2020, although the international oil price maintained an upward trend at the beginning of 2021, the oil companies were still cautious about the future trend of the industry at the performance conference. In order to regain the trust of investors respond to the concerns of investors on carbon emissions climate change, major oil companies have promised to formulate a transition strategy to zero emissions accelerate the pace of energy transformation. European oil companies began to make a comprehensive transformation, set off a wave of impairment by taking advantage of the opportunity of energy transformation, especially shell BP; American oil companies pay attention to improving their carbon treatment capacity, lag behind in energy transformation. Shell will gradually reduce the traditional oil gas exploration development sector to cash flow business, carry out asset layout for integrated natural gas, chemical refined oil business, develop new markets through growth businesses such as sales, renewable energy energy solutions, set the goal of achieving zero net emission in the whole life cycle by 2050. BP is committed to transforming an international oil company to an international energy company. It plans to gradually reduce the traditional oil gas exploration development refining sector to a cash flow business in the next decade, then create new business growth points through the layout of charging piles, renewable fuels hydrogen energy. Total changed its name to "total energies", showing its determination to transform into an integrated energy company. It plans to reduce the proportion of oil production 55% to 35%, vigorously promote the development of natural gas, renewable energy power generation business. ExxonMobil plans to set up a new business unit engaged in the commercialization of low-carbon technologies, plans to promote more than 20 CCS CCUs projects around the world. Chevron will increase its investment in low-carbon solutions by setting up a future energy fund.

The Enlightenment of 03 to China's oil companies

The provision of asset impairment is the requirement of accounting standards, it is also the conventional means of asset management. The vast majority of oil companies take the initiative to reduce the value every year under the condition of meeting the benefit requirements. Asset impairment management reflects the enterprise's strategic research judgment ability, risk control ability, internal management ability the ability to deal with the relationship with investors.

Most of the overseas assets of China's oil companies are purchased during the period of high oil prices. In the long-term grim situation of the oil gas industry, the imperative of energy transformation the increasing geopolitical risks, we should properly sort out, evaluate grade the overseas assets, strengthen the asset impairment test, reasonably calculate the necessary impairment, so as to reduce the future business risks. At the same time, we should promote the introduction of the management measures for the disposal of overseas assets of central enterprises at the national level to provide guidance for relevant enterprises.

The impairment test results of oil gas assets are affected by many technical economic parameters, which need the collaborative management of multiple production operation departments in oil enterprises. The technical economic parameters used in the impairment test are based on the prediction of the future, with full emphasis on the planning expectation of the remaining service life of the assets. Among them, the technical economic parameters that have a greater impact on impairment include the predicted oil price, production decline rate operating cost. In the case of uncontrollable oil price in the future, cost reduction production increase is the main way to effectively control the impairment risk of oil gas assets.

It is suggested that the non reversibility of impairment stipulated in Chinese accounting standards should be treated with caution. According to the risk preference of enterprises, we should make a reasonable judgment on the future development trend of the industry the trend of oil price, properly assess deal with the risk of asset impairment. On the one hand, it is necessary to carry out the necessary impairment provision according to the accounting standards objective economic laws; on the other hand, it is necessary to reduce the unnecessary loss of state-owned assets as far as possible.

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Source: International Petroleum Network