Bloomberg News

Oil Profits Slide Fastest Since Lehman Collapse on Gas: Energy

February 21, 2012

Feb. 21 (Bloomberg) -- Profits for the biggest U.S. energy producers including Exxon Mobil Corp. are poised to decline the most since the financial meltdown of 2008-09 as the drilling technique known as fracking collapses natural gas prices.

Exxon and Chesapeake Energy Corp., which today reports 2011 earnings, will see net income in 2012 slide about 8 percent and 10 percent, respectively, according to the mean of analyst estimates compiled by Bloomberg. That would be the biggest drop since 2009 for the companies, the largest U.S. gas producers.

While higher global demand for transportation fuels has driven up crude prices 32 percent since 2009, the domestic gas glut is pinching earnings for producers even as it pushes the U.S. toward energy independence. Especially hurt are Chesapeake and ConocoPhillips, which amassed gas assets before the full impact of fracking on supply growth was apparent, said Michael McMahon, a managing director for energy investments at Pine Brook Partners LLC, a private equity firm in New York.

“Fracking has opened up vast areas of development on a scale that’s practically overwhelming for the industry,” said William Dutcher, president of Dutcher and Co., an Oklahoma City- based operator of 1,300 oil and gas wells.

Oil output from U.S. fields including in shale rock is at a nine-year high and gas production hasn’t been this robust in almost four decades, Energy Department figures show.

“Shale has driven the gas price down to where it’s creating economic hardship for producers, especially those that made acquisitions in 2006 and 2007, when gas was so expensive,” Dutcher said.

Share Performance

As a result, the U.S., which burns more than one-fifth of the world’s crude and natural gas, will become largely energy self-sufficient by 2030, Robert Dudley, BP Plc’s chief executive officer, said last month.

The surge in gas supply in the shorter term weighs on the shares of drillers most dependent on the fuel for revenue.

Chesapeake underperformed the 43-member Standard and Poor’s 500 Energy Index in the two years through yesterday. It fell 10 percent in the period, while Exxon matched the benchmark’s 30 percent gain, according to data compiled by Bloomberg.

Gas futures traded in New York plunged 32 percent in 2011 to end the year at $2.989 per million British thermal units for the largest annual decline in half a decade. Since then, gas fell another 12 percent, thanks to mild North American weather that crimped demand for the fuel to run furnaces and added to the surfeit. The peak of $15.78 was reached in December 2005.

Shift Toward Oil

Chesapeake was one of the first gas explorers to announce production curtailments last month in response to tumbling prices. The Oklahoma City-based company today is expected to say net income for last year was little changed at $1.67 billion, helped by a shift toward more oil drilling that eroded reliance on lower-priced gas.

Facing a 2012 cash-flow shortfall that Raymond James & Associates Inc. analysts estimated at $3.5 billion, Chesapeake announced $10 billion to $12 billion in asset sales on Feb. 13 aimed at raising money. The planned sales are equivalent to 30 percent of the company’s total asset value.

Stung by free-falling gas prices, Chesapeake is burdened by a net debt load that is twice the size of Exxon’s, a company 27 times larger by market value.

Horizontal drilling techniques and advances in hydraulic fracturing, or fracking, developed in north Texas during the past 15 years have enabled energy producers to unleash oil and gas from rock formations such as shale.

Reserves in places like North Dakota and Pennsylvania that were once regarded as untouchable will make most energy imports superfluous during the next two decades, Dudley said.

Exxon-XTO

“Significant changes in U.S. supply and demand prospects, for example, highlight the likelihood that import dependence in what is today’s largest energy importer will decline substantially,” Dudley said in the company’s annual long-term global energy outlook on Jan. 18.

Exxon has been expanding its presence in shale and other so-called unconventional gas formations since its $34.9 billion purchase of XTO Energy in June 2010. The acquisition, which targeted XTO’s fracking expertise and gas fields, was Exxon’s largest transaction since buying Mobil Corp. in 1999.

Exxon’s output was 49 percent gas last year, up from 38 percent five years earlier, according to U.S. Securities and Exchange Commission filings. By contrast, for Chesapeake gas accounts for about 84 percent of output, down from 91 percent in 2006, a reduction driven by the company’s push to focus drilling on oil prospects.

‘Hurt Themselves’

Chevron Corp. and ConocoPhillips, the second- and third- largest U.S. energy companies by market value, also are expected to post their largest full-year profit declines in 2012 since 2009, when worldwide fuel markets were reeling from the collapse of demand in the wake of the financial crisis.

“In a sense, they’ve hurt themselves,” Leonard Coburn, president of Washington-based Coburn International Energy Consultants LLC and a former director of Russian and Eurasian affairs at the Energy Department. “But that’s why we’re seeing them shifting away from gas toward more oil.”

Shale formations will account for 49 percent of total U.S. gas production by 2035, up from 23 percent in 2010, the Energy Department said in a Feb. 14 report. When other geologic formations such as tight sands that require the same intensive drilling techniques are added in, unconventional fields will pump 77 percent of domestic supply by 2035, the department said.

The supply bonanza of gas and oil made possible with fracking means the U.S. will become increasingly independent of foreign energy producers at the same time as burgeoning economic powers such as China grow more reliant on overseas supplies, said Jonathan Chanis, managing member of New Tide Asset Management LLC in Torrington, Connecticut. That outlook assumes lawmakers and regulators at the federal and state levels won’t place expensive restrictions on drillers, he said.

“With the right policy decisions in Washington and places like Harrisburg and Albany, the United States will be in an extremely positive position,” Chanis said.

--Editors: Todd White, Will Kennedy

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net CHK US <Equity> COP US <Equity> CVX US <Equity> XOM US <Equity> APC US <Equity> APA US <Equity> EOG US <Equity> DVN US <Equity> MRO US <Equity> NBL US <Equity>


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