Oil Profits Slide Fastest Since Lehman Collapse on Gas: Energy

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. (CHK), which today reports 2011 earnings, will see net income in 2012 slide 7 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 drove up crude prices about 30 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.

Exxon and Chesapeake underperformed the Standard and Poor’s 500 Energy Index in the two years through Feb. 17 this year. Exxon rose 29 percent in the period compared with the benchmark’s 30 percent gain and Chesapeake’s 4.3 percent drop.

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 13 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.


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