NGI The Weekly Gas Market Report / NGI All News Access

E&P 3Q Profits May be Strong, but Future Still Murky

Even in an environment of plunging oil and natural gas prices, a credit crisis and an uncertain stock market, the energy sector has begun to unveil strong 3Q2008 earnings. The announced profit gains, however, could take a back seat to the quarterly conference calls, in which executives already have begun to hint at their exploration and production (E&P) plans -- and possible cutbacks -- for the coming year.

As 3Q2008 began, U.S. gas prices in July jumped to nearly $14/Mcf; oil nearly touched $150/bbl. Those higher prices should result in strong reports, but the sharp decline in commodity prices since last summer, the global credit crunch and stronger-than-expected onshore U.S. gas output may upset spending plans for many domestic gas-weighted producers in 2009.

"Even with lower oil prices, these companies still make a lot of money," said Estabrook Capital Management's David Foley. Still, he thinks investors will be "focused on what's going to happen later this year and next year with the economy and oil demand."

Wall Street forecasts are estimating the largest domestic producers may show gains of 25% or more from the same period a year ago. In fact, through the end of 2008, E&P profits may touch or pass historic highs -- because commodity prices overall are well above the average for the previous five years.

Together, ExxonMobil, Chevron and ConocoPhillips are forecast to net a combined $22.9 billion in 3Q2008, analysts estimate. At that rate, the three majors' earnings would jump 24% for the year to around $88.6 billion.

ConocoPhillips kicked off earnings season for the majors, issuing strong quarterly results last Wednesday (see related story). ExxonMobil is scheduled to report on Thursday (Oct. 30), and analysts forecast net profits will jump 27% from a year earlier. Meanwhile, Chevron, scheduled to report on Friday (Oct. 31), is seen to post the largest increase of the three with a 73% net gain to $6.43 billion.

For the North American-focused independents, the picture is murkier. U.S. gas producers are producing more gas than anybody expected -- and some are shaking things up as gas prices have tumbled.

In the past month a who's who of the domestic gas industry has announced budget cutbacks, including Chesapeake Energy Corp. (see NGI, Oct. 20), Petrohawk Energy Corp. (see NGI, Oct. 6a), Penn Virginia Corp. (see NGI, Oct. 6b), SandRidge Energy, Quicksilver Resources Inc., Equitable Resources, Denbury Resources and ATP Oil & Gas Corp. (see NGI, Oct. 13).

"Certainly in this environment of tighter credit and everyone being very cost-cautious, are the returns really there?" asked Quicksilver's Rick Buterbaugh, vice president for investor relations. "We definitely have pulled back." Quicksilver cut spending through the rest of 2008 by $100 million and already has laid down five drilling rigs in the Barnett Shale.

Colorado-based Vantage Energy LLC, formed two years ago to capitalize on emerging unconventional shales, had been negotiating with several neighborhood organizations in the Fort Worth, TX, area to obtain some Barnett Shale leases. Earlier this month Vantage and The Caffey Group, a Fort Worth-based land-acquisition firm, began backing out of some transactions completed in August that would have paid leaseholders bonuses of up to $27,500 and 23% royalties.

"Due to the market turmoil, combined with the drop in natural gas prices, it is no longer possible for Vantage Energy to lease acreage on a broad scale" in the Fort Worth area at the current terms being offered," Vantage stated.

Ed Ireland, director of the Barnett Shale Energy Education Council, noted that gas prices have "pulled back to under $7, so a price swing like that is always going to have an impact on a company's cash flow and their current activity level." He thinks it's only a "temporary cutback that reflects the current drop in prices." He expects gas futures to trade above $7 beginning next year and "drift upward" into 2011.

"A 20% reduction in U.S drilling activity (1,250 gas rig count in 2009) is likely to slow growth in U.S. gas production sufficiently to reestablish market equilibrium even after assuming a further 7.5% increase in well productivity," said SunTrust Robinson Humphrey/the Gerdes Group. Analysts led by John Gerdes estimated that if there is a reduction in drilling activity, "U.S. supply growth should slow to about a third of the growth experienced this year even after assuming a further 7.5% increase in well productivity."

The market likely will look past the quarterly profits and listen to what the producers are planning to do with their cash going forward, said Morgan Stanley in a note. Investors will look for "indications from executives of continued strong cash flows, as well as cues on any plans for mergers and acquisitions."

Standard & Poor's equity analyst Tina Vital, a former ExxonMobil engineer, said the majors and biggest independents would be insulated from the global credit crunch because overall production costs are low and there's ample cash in the till to fund exploration. Together ExxonMobil, Chevron and ConocoPhillips had estimated cash reserves of $48 billion at the end of June.

ExxonMobil CEO Rex Tillerson, speaking at the annual American Petroleum Institute meeting last week, cautioned that his management team was following the financial crisis and waiting to see how it might impact oil and gas prices. If there are changes in the company's cash flow profile, the share buybacks are "one place where we can certainly adjust quickly," but "the capital investment program is the first thing we are going to fund."

Oilfield service companies, funded by the oil and gas companies, also are preparing for the coming year. If E&P remains flat to strong, the service companies will do well, said Halliburton Co. CEO David Lesar.

However, Halliburton's Tim Probert, executive vice president for strategy and corporate development, said his company has made tentative plans to spend less in North America because of the oversupplied gas market. Around 10 E&Ps already have indicated to Halliburton that they will be cutting their 2009 budgets -- and nearly all of them are U.S. gas producers, he said.

Nabors Industries, the largest onshore gas driller, also sees a leaner 2009, and it has reduced its spending by at least $400 million over the next 18 months. CEO Gene Isenberg said Tuesday that his company expects its rig count to fall by 40 to 50 in 2009 because of the decline in the gas market. The estimated reduction is based on the total rigs in the industry dropping by 300 in 2009, he said. Nabors owns around 1,225 land-based rigs and offshore vessels.

The lost rigs are "a probability...that's not a certainty," Isenberg said. If the price of gas remains at current levels, rig use for gas projects "won't be as robust as we previously projected, or even as robust as what we're doing now."

©Copyright 2008 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.

Comments powered by Disqus