Sumitomo Corp. (8053) will set up a special investigation into how it lost almost $1.8 billion in Texas shale oil and Australian coal mining.
The probe comes after the company, Japan’s fourth-biggest trading house, cut its annual profit forecast by 96 percent after writing down the value of the two investments. Most of the losses were incurred at the shale oil project it shares with Devon Energy Corp. (DVN) of the U.S.
“I didn’t expect the loss could reach this level at all,” said Jiro Iokibe, a senior analyst at Daiwa Securities in Tokyo, adding that the next threat for shareholders is a possible cut to the company’s dividend.
The Tokyo-based company will form an internal committee to investigate the causes of the impairments at its natural resources operations, Chief Financial Officer Hiroyuki Inohara told reporters in Tokyo today. The company also scuppered plans to raise the ratio of resources assets in its investments.
Net income is forecast to total 10 billion yen ($91 million) in the year ending March 31, down sharply from the company’s May forecast of 250 billion yen, Sumitomo said in a statement. The bulk of the change comes from a 170 billion yen write down on the value of the shale oil development in the Permian Basin in Texas and a 30 billion yen write down of coal assets in Australia.
Royal Dutch Shell Plc booked a $2.1 billion charge in August last year, mostly related to liquid shale exploration in the U.S.
Sumitomo’s most high-profile failure came in 1996, when chief copper trader Yasuo Hamanaka lost about $2.6 billion in illicit trades of the metal in one of the biggest commodities trading scandals in history.
Japan’s Rating & Investment Information Inc. lowered Sumitomo’s credit rating outlook to negative from stable after today’s write downs.
“We don’t know if these impairment losses are all,” Daiwa Securities’ Iokibe said. “It’s unclear whether their net profit for this fiscal year can stay at 10 billion yen.”
Sumitomo’s Chief Executive Officer Kuniharu Nakamura told reporters in Tokyo that “unless we see a sharp drop in resources prices, there is no possibility of additional write downs.”
Sumitomo’s board plans to sell the northern part of the oil project it shares with Devon Energy, saying it’s “difficult to extract the oil and gas efficiently.” The company will also write down the value of an iron ore project in Brazil and its tire business in the U.S.
The company in August 2012 announced plans to invest about $2 billion in Texas’ shale oilfields via the purchase of a stake in the assets from operator Devon Energy. Sumitomo agreed to pay Oklahoma City-based Devon $340 million cash for 30 percent of the project located in the Permian Basin, the biggest oil resource in North America.
The company plans to stop production at its Isaac Plains coal mine in Australia with Vale SA (VALE5) after an industry downturn, it said in a separate statement today. The companies plan to cease operations at the venture in Queensland state’s Bowen Basin by the end of January, according to the statement.
Slowing demand from China and oversupply pushed the price of steelmaking coal to a six-year low in April, forcing some producers to close or idle mines. BHP Billiton Ltd.’s coal venture with Japan’s Mitsubishi Corp. in Australia will cut about 700 jobs to reduce costs, it said last week.
Sumitomo’s stock ended trading in Tokyo marginally higher at 1,377 yen, before it announced the write downs.