The write-offs could be huge.
If they could survive a couple disastrous quarters of write-offs, it might come out to EOX's advantage in the long run.
Write-offs mean reducing the value of the assets. But going forward into 2016 there would be a much lower depletion cost that might make operating profits more feasible. The way Wall Street works, they would much rather see a company take $200 million in charges one year, then earn $25 million for each of the next two years as opposed to losing $50 million three consecutive years.
That's down from $61 million in 2013. BOE for the Texas properties also declined from 1,270,000 in 2013 to 671,000 in 2014.
Apparently the investor presentations showing potential PV-10 of $140-280 million for these properties didn't get realized.
In order to be in position to avoid non-consent penalties and to make opportunistic investments in new assets, we will continue to evaluate various options to obtain additional capital, including borrowings under our Credit Facility, sales of one or more producing or non-producing oil and gas assets and/or the issuance of equity.......from page 15 of the 10-K
Impairments are a huge problem, because they cause violations of debt covenants. The resolution will be making WLL pay back a large part of that debt.
It doesn't stop the property impairments, but probably gives them positive net worth after the write-offs complete.
There are lots of other companies with similar or worse problems.
Not sure if you read the 10-K report, but the company put numbers to the risk of $50 oil throughout 2015. The potential write-off is $51 million. Add to that the Yahoo analysts estimates of losing 52 cents per share, or about $15 million, it wipes out 62% of existing equity.
I supposed some of the more levered E&P companies could see all of their equity wiped if $50 oil remains throughout 2015, making USEG a safer bet at $1.22/share than some of the others.
What might be interesting assuming the $51 million impairment, is much lower depletion costs going forward in 2016. Probably only $10/barrel.
EOX is so levered that it is an oil play. Either analyst could be right, depending on whether WTI stays in the $40's all year vs a rebound to $65.
You neglected to say how PV-10 declined 19% year over year.
Despite this, you are probably correct about all that oil being there. But it's development is contingent on acceptable pricing for oil.
That makes USEG an oil play like many others who are more levered....If oil rebounds, USEG gets its price back, but if oil stays down, USEG will have massive property impairments, in addition to an annual operating loss of $15-20 million.
At least they claim to have staying power.
One more comment from some one you called a retail investor.
It appears EOX tripled its property investment last year, with most of those purchases taking place in the second half of the year. The price paid for those properties exceeded that allowed for under the 2014 year end ceiling test. Basically they overpaid.
I didn't say I dislike wives of doctors, nor do I claim to like EOX. It is just a beaten down stock with some risk, but some time to allow oil prices to rebound.
My point of posting was to correct your misstatements.
What Hedge Fund Analyst would conclude that the 3 month rule makes sense for accounting purposes?
Oil assets often last 20 years, and to place a net present value on those assets based on only 3 months lookback is absurd and not realistic. Just because oil is low or high today doesn’t mean it will stay that way for 20 years. The current 12 month rule is too short, let alone a 3 month rule.
For the fun of it, I googled the 3 month look back SEC rule change you said is being considered. I can’t find a thing.
$51? That kind of misunderstanding is something one might expect from a woman or doctor, but not from a veteran trading E & P companies.
Check out page F-8 from the last 10-K where it explains the SEC method for the price used in valuing reserves….. The present value of estimated future net revenues is computed by applying prices based on a 12-month unweighted average of the oil and natural gas prices in effect on the first day of each month……
The above method applies to all companies, not just EOX. The Q1 rate will be $83 less adjustments for regional pricing. No company will be using the $51 rate in Q1.