Oil firms face write-offs after prices collapse

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The Independent Online
BRITAIN'S beleaguered oil exploration companies are considering hundreds of millions of pounds of write-offs against their 1993 results because of the sharp fall in crude prices.

The possibility of write-offs comes as the City braces itself for a dismal reporting season from the sector, starting with full-year results from Enterprise Oil on 10 March.

Oil shares have already come under pressure because of fears that some companies, including Enterprise and Lasmo, may be forced to cut their dividend. News of the possible write-downs could unsettle the market further.

There is a growing consensus in the industry that oil prices will stay low long term, causing a permanent diminution to the value of oil assets.

A sharp fall in oil prices in 1986, when Brent crude slumped from about dollars 23 to dollars 14 a barrel, prompted massive write-downs across the entire sector.

With Brent prices down to dollars 13.50 last week, oil prices have declined in real terms to their lowest level for more than a decade.

The issue centres on the 'ceiling test' - an accounting principle. Oil companies value energy assets according to their long-term expectations about the oil price.

In the past some took a bullish view, while others were more conservative, but the recent price collapse has exceeded all but the most pessimistic expectations.

Write-downs would hit shareholders' funds, causing gearing to rise, which in turn could breach bank lending conditions at some companies.

British Petroleum and Shell decided against a write-down in assets with their 1993 results, reported earlier this month. However, the industry is looking for a lead from Enterprise, regarded as one of the more conservatively managed upstream companies.

Insiders say it may delay such a move in the hope that oil prices recover after Opec's quarterly meeting late next month.

There are hopes that the oil producers' cartel may agree production cuts to boost prices. Few industry leaders expect prices to make up all the lost ground, however.

If no lasting Opec agrement is reached, Enterprise would make the write-down with its interim results later in the year.

There is speculation that some companies, including Lasmo, plan write-offs in the next few weeks.

Analysts say some valuations were based on prices that now look unrealistically high.