Nowhere is shale more hyped than in the Permian, now the biggest U.S. oil field. The excitement reached a fever pitch after the oil price crash of 2014-2016, when private equity rushed to get a piece of the action, getting what it believed would be a profitable entry point. Recently, many of those players have been forced to book massive impairments.
Concho Resources Inc., which Conoco agreed to buy in October, took a $12.6 billion charge for its oil and gas assets earlier last year, one in a long list of huge writedowns that followed a coronavirus-fueled collapse in crude prices. The move came two years after the company bought RSP Permian at a price that valued its oil and gas assets far higher than deals involving neighboring producers.
Apache Corp. also wrote down the value of its flagship Alpine High project, long touted as a prolific find in an ignored part of the Permian, which instead ended up being far richer in gas than oil.
At the start of the boom, when Aubrey McClendon was turning Chesapeake into a shale gas giant, the regulator changed its rules for how companies could calculate oil and gas reserves.
Many blame the relaxed regulatory environment on just how complicated calculating future production can be. It is, after all, an estimate based on assumptions like drilling times, how close together wells are fracked, and the cost of leasing land. As some engineers have said, reservoir engineering is more art than science.
“It‘s not a simple investigation because assets can be valued in many different ways,” Jakoby said. “The SEC will be looking for a smoking gun showing that management pushed for an overvaluation.”
This article was provided by Bloomberg News.