Dan is DD&A reporting a problem as discussed on the IV board

[par_putt]

From the IV board....
Potential Billions $$ of Shale Impairment Charges Coming : PXD, CXO, PE, FANG, XEC
After looking into FANG last week, I decided to check out some of other high growth, high EPS shale companies to see if there were some similar concerns.

The issue at hand is the massive and widening gap occurring between reported DD&A figures vs capital expenditure and acquisition costs.

The gap for FANG was enormous, and assuming the decline rate of average Permian shale wells, the depreciation costs should be increasing at a much faster rate than they are.Growth eventually feeds back into the pace of depreciation acceleration. But the feedback, for the most part, has not kept pace.

As Newtoboard commented, a lot of the the capex costs incurred beyond booked depreciation could relate to acreage that has yest to be developed. However i don't think this explains it all. And further to that point, it only compounds this issue further, as there would be very significant capex over and above these balances remaining to be incurred with the initiation of development.

In short, there is a massive outstripping of DD&A seeming to be happening in many of these companies.

Perhaps someone with a more comprehensive view of development schedule relative to acquisitions for each company could parse this proportion? (open question to the board here), But my feeling is that we are going to see something along the lines of what has occurred at Cimarex - large impairment charges:

Cimarex:

Year Capex DD&A Spread Impairment
2008 $1,596.00 $2,789.00 -$1,193.00 $2,242.00
2009 $444.00 $1,056.00 -$1,805.00 $791.00
2010 $977.00 $304.00 -$1,132.00
2011 $1,429.00 $390.00 -$93.00
2012 $1,415.00 $513.00 $809.00
2013 $1,531.00 $615.00 $1,725.00
2014 $1,740.00 $806.00 $2,659.00
2015 $1,008.00 $4,494.00 -$827.00 $3,716.00
2016 $692.00 $392.00 -$527.00
2017 $1,266.00 $446.00 $293.00
2018 $1,086.00 $590.00 $789.00

$13,184.00 $12,395.00
$6,749.00





2018 Revenues
$2,339.00

Spread / Revenues
34%











Pre- Impairment
322%


Notice that the spread after the incurred impairments has dropped from what otherwise would have been 3.2x

Parsley Energy and FANG seem to be the most at risk, both with cumulative un-depreciated capital cost balances over 4x their 2018 revenues. In other words, if these companies stop growing tomorrow, DD&A costs are going massively North relative to total revenues as the spread between capex is whittled down and erased.
In a steady state, or over the lifespan of the reserves, there should /will be no spread.

Given that most of the oil is extracted from a shale well in the first 5 years, there is a massive problem here for future EPS when growth peaks. It appears that DD&A is largely understated relative to the decline curve of a shale well.

Parsley:

Year Capex DD&A Spread
2013 $425.00 $28.00 $397.00
2014 $1,247.00 $94.00 $1,550.00
2015 $427.00 $178.00 $1,799.00
2016 $1,885.00 $234.00 $3,450.00
2017 $3,457.00 $352.00 $6,555.00
2018 $1,594.00 $585.00 $7,564.00

$9,035.00 $1,471.00




2018 Revenues
$1,826.00
Spread / Revenues
4.14


FANG:

Year Capex Depreciation spread
2010 $55.00 $8.00 $47.00
2011 $81.00 $16.00 $112.00
2012 $183.00 $26.00 $269.00
2013 $940.00 $66.00 $1,143.00
2014 $1,481.00 $170.00 $2,454.00
2015 $895.00 $217.00 $3,132.00
2016 $1,310.00 $178.00 $4,264.00
2017 $3,132.00 $326.00 $7,070.00
2018 $3,503.00 $623.00 $9,950.00
$11,580.00 $1,630.00




2018 Revenues
$2,176.00
Spread / Revenues
4.57






PXD:

Year Capex DD&A Spread
2008 $1,151.00 $489.00 $662.00
2009 $410.00 $651.00 $421.00
2010 $954.00 $499.00 $876.00
2011 $1,560.00 $578.00 $1,858.00
2012 $3,256.00 $810.00 $4,304.00
2013 $2,140.00 $889.00 $5,555.00
2014 $2,699.00 $1,047.00 $7,207.00
2015 $1,840.00 $1,385.00 $7,662.00
2016 $3,821.00 $1,480.00 $10,003.00
2017 $1,792.00 $1,400.00 $10,395.00
2018 $2,610.00 $1,534.00 $11,471.00

$22,233.00 $10,762.00




2018 Revenues
$4,992.00
Spread / Revenues
2.30

Concho:


Year Capex DD&A Spread
2008 $946.00 $117.00 $829.00
2009 $586.00 $196.00 $1,219.00
2010 $2,043.00 $249.00 $3,013.00
2011 $1,651.00 $400.00 $4,264.00
2012 $2,240.00 $575.00 $5,929.00
2013 $1,896.00 $772.00 $7,053.00
2014 $2,545.00 $979.00 $8,619.00
2015 $1,969.00 $1,223.00 $9,365.00
2016 $2,225.00 $1,167.00 $10,423.00
2017 $1,719.00 $1,146.00 $10,996.00
2018 $2,216.00 $1,478.00 $11,734.00

$20,036.00 $8,302.00




2018 Revenues
$4,151.00
Spread / Revenues
2.83

[dan_s]

I don't have a clue what this author is worried about.
DD&A for upstream companies is an expense based on the "units-of-production" method: Current Production during the quarter / Proved Reserves X Capitalized costs in the Full Cost Pool.

Since "Proved Reserves" is a conservative estimate of the actual oil & gas to be recovered, it is unlikely to be a problem in the out years.