Investors in oil and natural gas companies shouldn’t be surprised if asset writedowns for 2001 are in the $10 billion neighborhood, according to the John S. Herold, Inc. consulting firm, which already has tracked more than $2 billion in announced asset writedowns and impairments this year.

The research report put out by the Norwalk, CN-based firm titled “Fellow Energy Investors: Brace Yourselves for Some Nasty Year-End Numbers,” projects writedowns for the December quarter — like 1998 — will overwhelm operating profits. “We tracked $8.4 billion in writedowns in 1998 and would not be surprised to see another $10 billion for 2001,” Herold Chairman Arthur L. Smith said.”Wellhead oil and gas prices are off sharply from one year ago, and industry economics have suffered as adverse trends in reserve additions, operating costs and valuations have conspired together.”

Barring a rebound in natural gas and crude oil wellhead values by Dec. 31, Herold anticipates significant writedowns, asset impairments and ceiling test charges by energy companies for the year 2001.

With record high natural gas prices and spectacular cash flows in the March quarter of this year, energy executives launched very aggressive capital spending programs. By year-end, chief financial officers were struggling to rein in spending as evidenced by the sharp 32% plunge in the Baker Hughes count of active rigs since US activity peaked in August.

The Herold report also discussed the implications of the lower crude and natural gas price environment. It forecasts disappointing reserve additions for 2001. Proved reserves of oil and natural gas added in 1999 and 2000 which were booked due to improved upstream wellhead values are candidates in 2001 for negative revisions. “Looking to the 1998 experience, net positive revisions to existing reserves (a.k.a. “reserve growth”) for 2001 may be quite weak.”

And there’s further bad news. The Herold analysis predicts industry reserve replacement costs for 2001 could jump to an uncompetitive $8/boe versus the highly economic $5/boe experienced in 1999 and 2000. This is based on “runaway upstream spending (a jump in the numerator) concomitant with a major downgrade to reserve additions (a plunge in the denominator.)”

Smith stated, “Wall Street money managers will have another opportunity to chastise oil managements for their seeming addiction to drilling holes, making expensive acquisitions and destroying economic value. There is a silver lining; Herold believes that in bad news lies opportunity. It’s time for value investors to do some bottom fishing in quality energy company shares.”

For more information on the report, go to Herold’s web site at www.herold.com

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