By Erin Ailworth 

In a sign that U.S. energy producers think oil and gas prices will languish through next year, several are slashing their already slimmed-down budgets even more.

Eight companies including ConocoPhillips Co. and Marathon Oil Corp. collectively will spend $21 billion less in 2016 than they did last year when oil traded over $100 a barrel. American crude has since plunged by 60% to roughly $38 a barrel.

ConocoPhillips plans to cut spending next year by 55%, when compared with its 2014 budget, to $7.7 billion. Marathon's 60% cut to a $2.2 billion budget for 2016 is even steeper.

In theory, such limited budgets should take a bite out of production, but some companies predict that efficiency gains will allow them to pump more next year even as they spend significantly less on their operations. ConocoPhillips expects production to rise by as much as 3% in 2016.

The longer it takes for U.S. oil production to fall, the longer crude prices will languish. The low-price trend has already triggered a massive wave of asset write-downs.

Energy companies use commodity prices to estimate how much their oil-and-gas reserves in the ground are worth, so when prices fall those assets take a hit. In the last 12 months, oil has dropped from $69 a barrel to roughly $38, while natural gas has plummeted from $4 per million British Thermal Units to under $2.

Falling natural-gas prices are hitting U.S. energy companies just as hard as the crude-oil bust.

The strain showed as oil and gas producers reported their latest earnings, collectively writing off more than $60 billion in the third quarter, according to data collected by S&P Capital IQ. Some of the biggest charges were chalked up to the price of natural gas, which has dropped by nearly 51% in the last 12 months, more than oil's 46% decline.

The third-quarter charges represent nearly half of the roughly $134 billion written off by U.S. producers so far this year. Several of the most prominent American energy producers--including EOG Resources Inc. and Occidental Petroleum Corp.--booked impairments of $2 billion or more as natural-gas prices bit into the value of their holdings.

The big impairments suggest "that money you spent in the past hasn't given you a good economic outcome," said Tom Driscoll, managing director at Barclays. "You acquired assets that aren't worth what you paid for them."

Collectively, U.S. producers are taking tens of billions of dollars more in write-downs on their assets than they did during the oil bust of 2008.

The charges are a sign that many companies think energy prices are going to stay low and may be reconsidering their plans to drill in more expensive areas or on untapped acreage, industry experts said.

The U.S. Securities and Exchange Commission has been pressing producers to detail how a prolonged period of low energy prices would affect the value of their reserves, particularly those in areas where drilling hasn't yet taken place, said Marc Folladori, a lawyer with Haynes and Boone LLP who advises energy companies.

"These are really grim times," he said. "Gas, they're at the point where it is less or not economically feasible at all to produce it."

A glut of natural gas has helped push prices down over the last several years, while large-scale exports that might ease the oversupply aren't expected to begin in significant volumes until 2020. Warm winter weather forecast for this season won't help; demand for gas to heat homes is expected to be lower than in previous years.

The largest third-quarter write-down was logged by EOG, according to data from S&P Capital IQ. The Houston-based company blamed a $6.3 billion impairment on the eroded value of several properties, mainly aging gas fields and less economic drilling areas in the U.S. The impaired properties, once worth $8.9 billion, are now valued 70% lower at just $2.6 billion because of low gas prices, EOG said in a regulatory filing. The company declined to provide further detail.

Occidental booked a charge of more than $3 billion in the third quarter and linked $924 million of that to its U.S. gas operations. The company declined to provide more detail.

Chesapeake Energy Corp. and Southwestern Energy Co., two companies that pump more gas than oil, also took big hits. Chesapeake wrote off $5.4 billion in oil and gas properties and other assets, according to financial filings, while Southwestern wrote down nearly $3 billion. Both declined to comment.

The write-downs show which companies bought assets at high prices, and now may struggle because they have lots of debt or are spending too much, analysts said.

"Those are the companies that will not survive this cycle and be forced to consolidate," said Daniel Katzenberg, an analyst with Robert W. Baird & Co.

Write to Erin Ailworth at Erin.Ailworth@wsj.com

 

(END) Dow Jones Newswires

December 25, 2015 05:44 ET (10:44 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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