A $40bn warning

US independent oil and gas producers have issued a $40bn warning.

Triggered by the steep fall in oil and gas prices, US upstream producers have taken impairment charges for that sum, weighing heavily on their already stretched balance sheets.

And the worst part? There’s more to come. 

Chesapeake Energy, which took more than $10bn in pre-tax impairments in the first half, resulting in a loss of almost $8b, says: “Based on the first-day-of-the-month prices we have received over the 11 months ended 1 August, we expect to record another material write-down in the carrying value of our oil and natural gas properties in the third quarter.”

The write-downs are pressuring the producers’ debt-to-equity ratios and may limit their ability to borrow money. The impairments could be a precursor to reserves downgrades at the end of 2015, which would restrict their borrowing capacity further.

Moody’s Investors Service has already warned that US banks with high energy-sector loans may have to earmark more funds to provide for losses against their lending as a prolonged slump in oil prices strains energy borrowers’ ability to service those debts.

Among the mid to large independent producers, Apache has booked the largest impairment, at over $13bn so far this year. The write-downs drove Apache to a loss of $10.3bn in January-June compared with a profit of $417mn a year earlier. Devon wrote down the value of its US assets by $9.6bn in January-June.

But while the charges are painful in the short-term, they could help firms increase their returns in the long run when markets turn because impairments lead to a reduction in equity and lower depreciation charges.

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