Recently we have seen where several local gas companies namely EQT & CNX Resources use an accounting impairment for their Q4 2019 balance sheets. This impairment was issued for non-productive assets as I understand it. What exactly does this mean, how does it impact the balance sheet and what does it mean for the future value of those impairment assets?
First, a disclaimer...I am not an accountant.
Having cleared that up, it has been explained to me that E&P's will 'devalue' the asset on their balance sheets and P&L statements, most likely to gain a tax advantage.
It was explained to me that this impairment happens because of the price of NG, and the forward bearish curve on that metric...their assets are worth less in the near term because of said price decline.
Conversely, it also impacts their stock price, and that ain't good! The news is full of doomster stories about fossil fuel stocks in general.
Repeating my no accountant caveat...maybe others will explain it better.
Do the E&P companies have to cover that impairment charge at a later date to make it even, so to speak. In other words, do those impaired asset`s have to earn future value to match the impairment? If so, doesn`t that create a serious hardship to overcome? Will those assets be unrecoverable and subject to sell?
EQT is looking to sell a % of future royalties to cover 1/5 of their debt. If these companies can’t generate enough to cover expenses and upcoming debt payments they have to sell something. Hopefully companies don’t have to have a fire sale and/or drill like crazy to make payments. The NG price is already tanked. Strong E&P’s that don’t have much debt will become bigger buying cheap.
Does imposing the impairment charge mean those assets are dead now? Will the gas companies have no other choice but to sell-off those leases?
I would not think 'dead' would be an apt description, but certainly worth less after the impairment charge.
Carrying these less valuable assets does not mean they need to be sold off, as we know a real $$ loss only will happen once the asset is sold at a steep discount.
Guessing here...if NG prices climb and stabilize at a more favorable level, and an E&P has not sold off those devalued assets, they will again be worth more and could again be utilized to make a profit or procure capital via borrowing.
Other than the book keeping entries, the asset doesn't cost you anything more or less (in a purely practical sense)...until you sell it and monetize the loss.
One of the biggest affects I can see would be the hindrance of borrowing capital to run the business...the balance sheet will show fewer asset $$ against which one can borrow.
Tough times indeed for the smaller regional NG players.
Thanks Bullfrex, I`m just trying to wrap my head around this accounting maneuver and it`s impact to the gas company. I guess I`m thinking the impairment charge needs to be reversed to satisfy the IRS someday, and at what cost? Your thought that these impaired assets may cause the gas company to suffer the risk or hindrance to reporting future profit or securing operating capital makes sense to me. Is this a one time charge? What about this year when the market remains stagnate? Can they do it again?
farmgas, this might be just an internal maneuver to defer tax obligations. In the long run, it doesn't seem to be a healthy practice, more of a 'keep the place running' strategy.
I would think they certainly could do it again, but each instance of this impairment would send another red flag to investors/bankers and signal a further weakening of the balance sheet...not desirable.
Until NG prices recover, we will probably see more of this as E&Ps try to remain viable.