OIL AND GAS ASSET IMPAIRMENT BY FULL COST AND SUCCESSFUL EFFORTS FIRMS

Petroleum Accounting and Financial Management Journal, Fall 2004 by Al-Jabr, Yahya, Spear, Nasser

On the other hand, SFAS 121 is considered more stringent than the ceiling test in one aspect. SE firms are required to group their assets when applying SFAS 121 "at the lowest level [such as a field or reservoir level] for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets" (SFAS 121, paragraph 8). However, FC firms, in applying the ceiling test, group their assets at a country level. Grouping assets at a field or reservoir level under SFAS 121, as opposed to a countrywide level under the ceiling test, will result in fewer losses on some of the grouped assets being offset by gains on others. As a result, the level of asset grouping required by SFAS 121 represents a more stringent requirement than that of the ceiling test. This has led Gallun et al. (2001, p. 244) to conclude that because of the level of asset grouping under SFAS 121,"the effect of the FC ceiling test may be much less dire than SFAS No. 121."

Sample Selection and Data Sources

The sample includes US oil and gas firms that are classified as "domestic exploration and production" in the Herold database and that have significant oil and gas exploration and production activities. This criterion ensures the exclusion of firms with major non-exploration and production activities. The criterion is applied by including only firm-year observations that have more than or equal to 50% of their operating revenue generated by oil and gas exploration and production activities.7

After excluding outliers, the final sample consisted of 1623 firm-quarter observations of 46 SE and 48 FC firms in the period 1995-2001. Key financial data were collected from the Compustat database and the write-down data were hand collected from firms' 10-Q filings.

Descriptive Statistics of Key Financial Variables

Table 1 presents descriptive statistics for key financial variables for all quarterly intervals. These variables are defined as:8

* mv^sub t^ is the market value of equity (in millions of dollars);

* bv^sub t^ is common equity. Δx^sub t^ is the change in earnings (x^sub t^ - x -1);

* oa^sub t^ is operating assets which are calculated as common equity minus cash and marketable securities plus short-term debt plus long-term debt plus preferred stock plus minority interest;

* Δ oa^sub t^ is the change in operating assets (oa^sub t^- oa^sub t^-1);

* ci^sub t^ is cash investments which are the negative of cash flows from investing activities; and

* Δ ci^sub t^ is the change in cash investments (ci^sub t^ - ci^sub t^-1).

The data reveal a wide size range with a minimum market value of equity (mv^sub t^) of $1.264 million and a maximum of $10,886.235 million. The sample has an average market value of $669.533 million and a median of $152.865 million. Thirty-three percent of the observations have negative earnings (x^sub t^) leading to an average x^sub t^ of-0.8% (of the beginning market value of equity) and a median of 0.7%. The median change in earnings (Δx^sub t^) is 0.1% of the beginning market value of equity reflecting a very small growth in profitability on average.