Sumitomo Corp of Japan has drawn a line under its disastrous two-year foray into shale oil in the US, with writedowns connected to the project almost completely erasing its full-year earnings.
On Monday, Sumitomo, the fourth biggest of Japan’s trading companies by market capitalisation, said that an impairment loss of Y170bn ($1.6bn) on a “tight oil” project in west Texas would form the bulk of Y240bn of charges for the fiscal year to March 2015.
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It also flagged a Y30bn charge on coal-mining assets in Australia and a Y50bn impairment on an iron-ore mining project in Brazil.
Combined, Sumitomo said the losses would cut its full-year profit forecast by 96 per cent, from a projected Y250bn to Y10bn. That would mark the 95-year-old company’s worst result since a Y23bn loss in the 1998 fiscal year, when it paid fines to atone for a copper-trading scandal that rocked world markets two years earlier.
“Even by the standards of trading companies, this is not good,” said Ben Wedmore, co-head of Japan equities at Mirabaud Securities, part of a Geneva-based private bank, drawing parallels to Mitsui & Co’s costly exposure to BP’s blowout in the Gulf of Mexico. “This was [Sumitomo’s] biggest investment in oil by far, and it has gone wrong.”
Sumitomo was among the most aggressive in ramping up investments in resources in the wake of the Fukushima nuclear accident of March 2011, which spurred imports of oil, coal and liquefied natural gas into the world’s third-largest economy.
In August 2012, the company announced that it had struck a deal with Devon Energy of Oklahoma to pay $340m in cash for 30 per cent of a project in the Permian Basin, saying it would supply another $1bn to fund most of the cost of drilling wells.
Tight oil involves the extraction of crude oil from rock formations using similar technologies as in shale gas extraction.
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Yet on Monday, Sumitomo said it had decided to sell roughly three-quarters of its acreage, triggering the loss on the assets and the agreement to fund their development. “It is difficult to extract the oil and gas efficiently,” the company said, adding that it could not “expect as much production to recover the investment”.
Other Japanese trading companies have taken big writedowns as shale bets have soured. Itochu Corp, the third largest trader by market capitalisation, has written down about four-fifths of the Y78bn it paid in 2011 for a 25 per cent stake in family-owned Samson Investment of the US.
Separately, Sumitomo said on Monday that it would stop operations at its Isaac Plains coking-coal mine in Queensland, Australia, by the end of January, as prices languish amid a global glut.
Sumitomo had flagged trouble with the Bowen Basin-based project – a joint venture with Vale, the Brazilian miner – in May, as it took a Y28bn writedown on an asset for which it had paid A$430m two years earlier.
Sumitomo’s management and monitoring of risks “is not necessarily working well”, said R&I, the Japanese credit rating agency, as it cut its outlook on the company, rated double A minus, to negative from stable.