For any investors in the energy sector who have not paid attention for the past few years, Hurricane Isaac should have taught them a lesson...the economics of the U.S. energy industry has changed drastically thanks to the shale revolution brought about by hydraulic fracturing (fracking).
Hurricanes in the Gulf of Mexico used to send natural gas prices soaring due to the supply disruptions from the region. But no longer. Now the Gulf of Mexico produces only 7 percent of total U.S. natural gas as opposed to the 20 percent it produced as recently as 2005. Fracking has led to such a boom in gas production in the continental United States that there is now a huge glut of gas on the market. This glut has pushed down the market price of natural gas so low that it is leading to problems for the gas production companies.
This gas glut will lead to, when full-year results are revealed in 2013, a great number of natural gas firms taking large writedowns in their reported reserves. In other words, these companies will be revising downward (some more than others) the commercial prospects for their natural gas assets. This is important in many cases because many oil and gas agreements with banks link borrowings to reserves. The hit may be exceptionally hard, and catch investors off guard, at gas companies which were too aggressive in booking reserves.
The weakness in natural gas prices has even affected the big energy companies like ExxonMobil (NYSE: XOM), which after its purchase of XTO Energy is the biggest U.S. producer of natural gas. Poor results from its gas division led Exxon CEO Rex Tillerson in June to say that energy companies were “all losing our shirts” thanks to the very low gas prices.
But the poster child for these upcoming writedowns has to be the most aggressive of the natural gas companies, Chesapeake Energy (NYSE: CHK). In its second quarter results, the company already wrote off 4.6 trillion cubic feet of natural gas reserves. That was 24 percent of its reserves and equivalent to more than two months of U.S. consumption of gas! However, that was offset somewhat by reserve additions to make the net decline only 7 percent. Its full-year 2012 results, which should have some massive writedowns, will certainly have its suffering shareholders on edge.
Chesapeake has hardly alone in announcing reserve writedowns in its latest earnings reports. One of Canada's major natural gas producers, Encana (NYSE: ECA), took a second quarter loss of $1.48 billion after it took a $1.7 billion charge on some of its gas assets thanks to the low prices. And it warned that further writedowns were to come in the months ahead.
Natural resources giant BHP Billiton ADR (NYSE: BHP) also announced a major writedown. In August, it took an impairment charge of $2.84 billion against its Fayetteville gas assets that it acquired from Chesapeake Energy in February 2011 for $4.75 billion. The company ended up entering the U.S. gas market in a big way just before the major downturn in gas prices. BHP also wrote down the assets thanks to lower than expected production from the gas fields.
Smaller gas producers have also been hit, such as Ultra Petroleum (NYSE: UPL) which announced a $1.1 billion writedown on its natural gas assets, resulting in a $1.2 billion loss in the second quarter. Its average selling price for gas fell plunged 22 percent from $5.17 a year earlier to $4.04 in the second quarter of 2012. The company owns gas fields in Pennsylvania and Wyoming.
The only way for this situation to turn around in the long term for the natural gas producers is to see a substantial cutback in drilling activity. Some cutbacks have already occurred...the number of working gas rigs in the U.S. has fallen by almost half in the past year. However, figures from energy consultancy Bentek Energy show that gas production still rose by about 5 percent in the first half of 2012 due to increased rig efficiency.
Translation? A lot more drilling activity has to be cut back before natural gas prices can enjoy a sustainable rise, ending the writedowns and the troubles for gas companies' shareholders.
This article originally appeared on the Motley Fool Blog Network. make sure to read all my articles for the Motley Fool at http://blogs.fool.com/tdalmoe/,
Showing posts with label exxonmobil. Show all posts
Showing posts with label exxonmobil. Show all posts
Monday, September 17, 2012
Thursday, July 5, 2012
Lower Oil Prices and the Global Economy
Stock market investors are betting on central banks like the Federal Reserve sparking the global economy back to robust health through monetary policy. However, with interest rates already at zero for all practical purposes, the main weapon remaining in the Fed's arsenal is money printing through quantitative easing and other measures. And the effects of that medicine seems be less and less with every dose given.
But investors should not despair...right now, there is another force at work stimulating economic growth around the globe. What is it? Lower oil prices!
Since March alone, oil prices have declined by more than 30 percent, leaving consumers more spending power. The global benchmark for oil, Brent crude, has tumbled to its lowest level in over 18 months and is now trading below $90 a barrel. Quite a drop from its peak earlier this year at $128.40 per barrel. And that is thanks largely to Saudi Arabia boosting production earlier this year to a 30-year high in effort to help the global economy.
The drop in crude oil prices is a definite negative for investors in the oil patch though. Take a look at three of the large international oil companies – ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and BP PLC ADR (NYSE: BP). The stock prices of both Exxon and Chevron have fallen by about 5 percent while BP has tumbled by a double-digit percentage so far in 2012. And their share price is unlikely to rebound strongly in the near future.
The reason? Lower oil and gas prices means lower earnings for these companies. According to FactSet, ExxonMobil is expected to earn $8.09 a share in 2012 versus $8.37 in 2011, Chevron is forecast to earn $12.98 per share in 2012 against $13.28 in 2011, and BP is predicted to earn $6.26 per share in 2012 compared to $6.89 in 2011.
So oil companies look to be losers in 2012 thanks to low oil prices. But there will be winners too. These are the big oil consuming industries such as airline and trucking companies. There is some evidence already that, for example, airlines are benefiting. The airline industry trade group IATA (International Air Transport Association) has hinted that the drop in jet fuel costs has already saved airlines nearly $20 billion (out of a forecast annual $207 billion price tag) in their costs. More evidence of lower oil prices being a boost to earnings in these sectors may become apparent when these firms start reporting results from the April-June quarter in the weeks ahead.
The interesting thing occurring right now in the oil market, which is both good but scary, is the lack of hedging by large oil users like airlines despite the 30 percent drop in oil prices. One would think major users would want to lock in these lower prices. But they are not at the moment.
The chief financial officer at Southwest Airlines (NYSE: LUV) said earlier this year that the company's hedge protection for the second quarter of 2012 was “minimal”. And according to the Financial Times, an executive vice-president at FedEx. Michael Glenn, stated last week that “lower fuel prices will help [his company]”.
But the scary part is that this lack of hedging is eerily reminiscent of 2008 when these companies did not hedge their fuel costs in anticipation of even lower oil prices thanks to growing economic weakness around the globe. They are apparently betting on further economic weakness coming out of Europe and China, the main engine of oil demand.
But the oil price weakness scenario could change rather quickly. Current oil prices are now below what could be called the comfort threshold for most OPEC countries including Saudi Arabia. These countries' budgets have ballooned in the past few years as they have spent on improving their citizens' daily lives because of the fear of widespread unrest as the Arab Spring moves from country to country in that part of the world. It is believed that Saudi Arabia, for example, now needs Brent crude oil to be at around $90 a barrel in order to pay for all the domestic programs they have initiated.
So investors and hedgers should not be surprised if it soon throttles back on oil production. Hopefully, airlines and other big oil consumers will have hedged their exposure to higher prices by then.
This article was originally written for the Motley Fool Blog Network. make sure read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
But investors should not despair...right now, there is another force at work stimulating economic growth around the globe. What is it? Lower oil prices!
Since March alone, oil prices have declined by more than 30 percent, leaving consumers more spending power. The global benchmark for oil, Brent crude, has tumbled to its lowest level in over 18 months and is now trading below $90 a barrel. Quite a drop from its peak earlier this year at $128.40 per barrel. And that is thanks largely to Saudi Arabia boosting production earlier this year to a 30-year high in effort to help the global economy.
The drop in crude oil prices is a definite negative for investors in the oil patch though. Take a look at three of the large international oil companies – ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and BP PLC ADR (NYSE: BP). The stock prices of both Exxon and Chevron have fallen by about 5 percent while BP has tumbled by a double-digit percentage so far in 2012. And their share price is unlikely to rebound strongly in the near future.
The reason? Lower oil and gas prices means lower earnings for these companies. According to FactSet, ExxonMobil is expected to earn $8.09 a share in 2012 versus $8.37 in 2011, Chevron is forecast to earn $12.98 per share in 2012 against $13.28 in 2011, and BP is predicted to earn $6.26 per share in 2012 compared to $6.89 in 2011.
So oil companies look to be losers in 2012 thanks to low oil prices. But there will be winners too. These are the big oil consuming industries such as airline and trucking companies. There is some evidence already that, for example, airlines are benefiting. The airline industry trade group IATA (International Air Transport Association) has hinted that the drop in jet fuel costs has already saved airlines nearly $20 billion (out of a forecast annual $207 billion price tag) in their costs. More evidence of lower oil prices being a boost to earnings in these sectors may become apparent when these firms start reporting results from the April-June quarter in the weeks ahead.
The interesting thing occurring right now in the oil market, which is both good but scary, is the lack of hedging by large oil users like airlines despite the 30 percent drop in oil prices. One would think major users would want to lock in these lower prices. But they are not at the moment.
The chief financial officer at Southwest Airlines (NYSE: LUV) said earlier this year that the company's hedge protection for the second quarter of 2012 was “minimal”. And according to the Financial Times, an executive vice-president at FedEx. Michael Glenn, stated last week that “lower fuel prices will help [his company]”.
But the scary part is that this lack of hedging is eerily reminiscent of 2008 when these companies did not hedge their fuel costs in anticipation of even lower oil prices thanks to growing economic weakness around the globe. They are apparently betting on further economic weakness coming out of Europe and China, the main engine of oil demand.
But the oil price weakness scenario could change rather quickly. Current oil prices are now below what could be called the comfort threshold for most OPEC countries including Saudi Arabia. These countries' budgets have ballooned in the past few years as they have spent on improving their citizens' daily lives because of the fear of widespread unrest as the Arab Spring moves from country to country in that part of the world. It is believed that Saudi Arabia, for example, now needs Brent crude oil to be at around $90 a barrel in order to pay for all the domestic programs they have initiated.
So investors and hedgers should not be surprised if it soon throttles back on oil production. Hopefully, airlines and other big oil consumers will have hedged their exposure to higher prices by then.
This article was originally written for the Motley Fool Blog Network. make sure read all of my daily articles for the Motley Fool at http://blogs.fool.com/tdalmoe/.
Monday, June 18, 2012
Alaskan Pipeline to Fuel US LNG Exports
The glory days of the Alaskan oil boom are long gone. Alaska's oil production, which at just above 2 million barrels a day in 1988, was less than a third of that at 563,000 barrels a day last year. Oil production from our 49th state is expected to continue declining. However, there is hope.....
Alaska may be able to relive past glories if the huge reserves of stranded natural gas on the state's North Slope can be brought to anxious buyers around the globe, particularly from Asia. Alaska's North Slope has proven reserves of 35 trillion cubic feet of gas, about one-eight of the US total, and unproven reserves estimated at 236 trillion cubic feet. The state already has significant gas production, the equivalent of about 1.5 million barrels of oil a day. But almost 90 percent of that natural gas is reinjected back into the fields because there is no existing way to deliver that gas to customers.
Initially, plans were being laid to ship some of that stranded gas to the lower 48 via a pipeline which was to built by ExxonMobil (NYSE: XOM) and TransCanada Corporation (NYSE: TRP). That idea is still alive technically since it is awaiting approval from the US Federal Energy Regulatory Commission. But for all intent and purposes, it is dead. The US shale boom and plunge in US natural gas prices has made it difficult to justify the project's estimated $40 billion cost.
Alaska's hope was rekindled though several months ago when three of the major international oil companies – ExxonMobil, BP PLC ADR (NYSE: BP) and ConocoPhillips (NYSE: COP) – reached agreement with the state of Alaska to move forward on a $40-$50 billion project to export liquefied natural gas (LNG) to Asia. The companies agreed on a target of 2016 for the large scale project which would include not only a pipeline but a gas liquefication plant to turn the gas into LNG for export to Asian markets.
There is a ready market in Asia for US exports of LNG. Even ignoring China, there is abundant demand for LNG from Japan where all nuclear power facilities have now been shut down. Before the Fukushima accident last March, nuclear generation accounted for about 30 percent of total electricity supply. No wonder then Japan needs some other fuels to power their electric plants and that LNG is selling there for 6-7 times what the US benchmark for natural gas is currently traded.
The Japanese are already hunting for LNG export deals in the United States. In April, its two largest companies – Mitsubishi and Mitsui – signed a 20-year supply agreement to import at least 4 million tons a year of LNG from a new export facility to be built at a site in Louisiana owned by Cameron LNG, a subsidiary of the utility Sempra Energy (NYSE: SRE). The facility could begin exporting LNG to Japan by 2016, if regulatory approval is received.
Probably the key to the success of the proposed Alaskan pipeline will be if long-term contracts are signed for LNG delivery to Chinese energy companies which have been scouring the globe for such deals. It is highly likely that such deals will be forthcoming since final delivery costs for Chinese buyers will be approximately $10 per million BTU, which is less a third of the current rate in Asia.
These contracts with eager Asian buyers will make the project a profitable one for the companies involved and their shareholders. The logistics of the project should be solved within a year, so the only possible obstacle will be a political one if US politicians think its smarter to reinject gas back into the ground rather than selling it on the world market. Hopefully, the politicians will just stay out of the way on this one.
This article was originally written for the Motley Fool Blog Network. Make sure to read all my daily articles for the Motley Fool at http://blogs.ffol.com/tdalmoe/.
Alaska may be able to relive past glories if the huge reserves of stranded natural gas on the state's North Slope can be brought to anxious buyers around the globe, particularly from Asia. Alaska's North Slope has proven reserves of 35 trillion cubic feet of gas, about one-eight of the US total, and unproven reserves estimated at 236 trillion cubic feet. The state already has significant gas production, the equivalent of about 1.5 million barrels of oil a day. But almost 90 percent of that natural gas is reinjected back into the fields because there is no existing way to deliver that gas to customers.
Initially, plans were being laid to ship some of that stranded gas to the lower 48 via a pipeline which was to built by ExxonMobil (NYSE: XOM) and TransCanada Corporation (NYSE: TRP). That idea is still alive technically since it is awaiting approval from the US Federal Energy Regulatory Commission. But for all intent and purposes, it is dead. The US shale boom and plunge in US natural gas prices has made it difficult to justify the project's estimated $40 billion cost.
Alaska's hope was rekindled though several months ago when three of the major international oil companies – ExxonMobil, BP PLC ADR (NYSE: BP) and ConocoPhillips (NYSE: COP) – reached agreement with the state of Alaska to move forward on a $40-$50 billion project to export liquefied natural gas (LNG) to Asia. The companies agreed on a target of 2016 for the large scale project which would include not only a pipeline but a gas liquefication plant to turn the gas into LNG for export to Asian markets.
There is a ready market in Asia for US exports of LNG. Even ignoring China, there is abundant demand for LNG from Japan where all nuclear power facilities have now been shut down. Before the Fukushima accident last March, nuclear generation accounted for about 30 percent of total electricity supply. No wonder then Japan needs some other fuels to power their electric plants and that LNG is selling there for 6-7 times what the US benchmark for natural gas is currently traded.
The Japanese are already hunting for LNG export deals in the United States. In April, its two largest companies – Mitsubishi and Mitsui – signed a 20-year supply agreement to import at least 4 million tons a year of LNG from a new export facility to be built at a site in Louisiana owned by Cameron LNG, a subsidiary of the utility Sempra Energy (NYSE: SRE). The facility could begin exporting LNG to Japan by 2016, if regulatory approval is received.
Probably the key to the success of the proposed Alaskan pipeline will be if long-term contracts are signed for LNG delivery to Chinese energy companies which have been scouring the globe for such deals. It is highly likely that such deals will be forthcoming since final delivery costs for Chinese buyers will be approximately $10 per million BTU, which is less a third of the current rate in Asia.
These contracts with eager Asian buyers will make the project a profitable one for the companies involved and their shareholders. The logistics of the project should be solved within a year, so the only possible obstacle will be a political one if US politicians think its smarter to reinject gas back into the ground rather than selling it on the world market. Hopefully, the politicians will just stay out of the way on this one.
This article was originally written for the Motley Fool Blog Network. Make sure to read all my daily articles for the Motley Fool at http://blogs.ffol.com/tdalmoe/.
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