Profits for the biggest U.S. energy producers including Exxon Mobil Corp. (XOM) 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. (CHK), 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 (COP), 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. (CVX) 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.
Don’t tell the libs that profits can decline at an oil company. They will still complain that a company should be making a profit.
Fracking is a short-term band aid fix for an ongoing dilemma. The fracking boom is set to last for at most 5 years. To suggest that it means long-term energy independence for the US is an utter fantasy, and it just shows how desperate some folks are to clutch at anything that offers any sort of hope.
Mark my words – the fracking boom will be followed by a fracking bust, and at the end of it we’ll be far worse off than we would have been if we’d kept that oil in the ground.
OK Ian-your words are “marked”. I especially like the comment “…at the end of it we’ll be far worse off than we would have been if we’d kept that oil in the ground.”
Did you get that from the Whitehouse, NRDC or Al Gore? Either way, what a statement.
Mark these words-unconventional resources, plus conventional resource use would tremendously help the entire US Economy if our current Administration had a clue how to manage the Economy. failing to bolster energy independence means further reliance on foreign oil and less control of our own Economy. If Obama would put forth the same effort to build jobs by encouraging energy development that he expends trying to grow Government (since he never has worked in a non-government supported job and knows little about Business), the Economy would recover faster, so-called “inflated gasoline prices” would fall and businesses in other ventures would also improve because a growing economy causes business and job growth. but als, Obama only knows how to work at a Government Job, so he has no clue about how to make a business thrive and grow.
Boo-hoo for big oil. Gee, you would think that they could have figured out that they were putting too much into gas capacity, but that’s where they were channeling excess profits. I am tired of these liars and propagandists, but even more weary of the idiots who can’t see the obvious. Oil companies don’t give a darn about US “energy independence.” What they are doing now is gambling that driving down the price of gas will reduce investments in renewable energies, so that in a few years, we will hear they “drill, baby, drill” rhetoric again as they whine about lack of capacity and how long it will take to get alternatives to market. Monopolists, bribing politicians, and pandering to utter fools. Gasoline prices now are where they were in 2007. Gasoline, however is a net EXPORT. Why? All those liars who convinced stupid conservatives that the EPA prevented them from investing in refining capacity have REDUCED the capacity they had. To keep prices up, screwing the American consumer, and laughing at the Palin-inspired dipsticks on the right. Republicans areeithere exploiting the stupid, or they ARE the stupid.
The Department of Energy estimates that there is some 800 trillion cubic feet of gas in shale formations in the United States. That is a huge natural resource, but the gas market has always been a victim of large swings in commodity prices, which makes it hard for companies to develop.
The Eagle Ford sounds just like the Austin Chalk play, a solution to end all our worries. There are still shuttered facilities in places like Giddings and La Grange after the Chalk went bust. Of course, the wind will always blow in West Texas, and the sun will shine. Maybe we should work on those sources.
Don’t worry your little pea brains RWNJs, good ole Exxon will be able to pay their bills.
They only made 9 billion last quarter. Yep, they need more tax breaks.
drill baby drill, oh wait, they need to make a profit,
hmm, which group was the socialist nitwits again.
i was thought that the price of gas/oil/refined products was
based international markets and supply and demand.
but the drill baby drill crowd had convinced me that drilling
would solve all issues, gas to $2.00 a gallon, but wait,
companies are cutting back production, shutting refineries?
what happen to drill baby drill? never worked?
One of the bills recently passed – I forget exactly, but I’m pretty sure it was the one that also had Keystone XL – would increase offshore exploration/drilling significantly over the next 10 years or so. That should be good for Houston, and more importantly good for innovation.
FLASH! Energy fans! 1. Fracking is a COMPLETION technique, along with water floods, acidizing, etc., not a drilling technique. Fracking is done by well servicing companies when the drilling contractor has finished the drilling of the well AND the logging company (i.e. Schlumberger or others) has finished detailing how much hydrocarbon potential the well has. and 2. Fracking has been around over fifty (50) years that I know of. Sure, there have been advancements, but there have been far more advancements in drilling technology than in fracking! I was an engineer on the first “super sand frac” job ever done many years ago and that was deemed at the time to be the end-all, be-all of fracking! Now we are looking at fracking with fruit juice for heavan’s sake! To say that fracking is causing a glut in gas and, thus, a downward spiral in prices and profits is ridiculous. If I was the guru many of these people claim to be, I would be looking at a very mild winter causing severe reductions in demand for natural gas and an amazing increase in supply evidenced by the numerous shale plays that have been discovered recently…not fracking!!
Reidthis, stop smoking rock. You honestly think Exxon and the mighty few will let oil prices drop. THE SAUDIS won’t even let that happen on a global scale. When oil becomes available, THEY SHUT DOWN PLANTS. What’s so hard about this? You love oil companies, that you probably don’t a have a single stake in, soooo much that you would rather talk about Obama, who can do nearly nothing about these private companies and foreign interests. You lord and savior Republican party tried giving them unrestricted access to whatever they wanted and prices still shot up. When are you going to place the blame and pressure where it belongs?
We’re drill, baby, drilling everywhere and the drillers are now losing money because of it. To quote Forrest Gump: ‘stupid is as stupid does’, and that’s as stupid as it gets right there.
This might be the one thing that stops fracking in its tracks: the same capitalist pig-faced greed that drove the boys wild in the beginning is now bleeding them white.
Couldn’t happen to a nicer bunch of vampires.
The oil biz has been boom bust for 100 years.
This is not new and should be no surprise.
It is only bad if you are in love with still
expensive non-fossil energy.
If CNG conversions for vehicles were more popular, and not so expensive with home charging stations. Break even time is far too long to make it practical now.