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Analysts: Producer Earnings to be Worst in Several Years

U.S. onshore natural gas production is on cruise control, but the economy, and commodity prices, are in reverse. The result: more than a few fender benders as exploration and production (E&P) companies issue quarterly earnings reports in the coming days.

"Given the massive rout in commodity prices and crack [refining] spreads that occurred during the quarter, 4Q2008 financial results will be the worst in several years," said UBS energy analyst Andrew Potter. He predicts that cash flow per share could fall as much as 38% sequentially from 3Q2008 and be off 24% from the same period of 2007.

As oil and natural gas prices dropped toward the end of 2008, and as the credit crisis grew, E&Ps began to lay down rigs in some of the more prolific North American gas basins. And the move already is having a devastating effect across the energy sector. Oilfield services leader Schlumberger Ltd. is cutting 5,000 jobs worldwide, with at least 100 jobs lost in Houston. Baker Hughes Inc. (BHI) will cut around 4%, or 1,500, of its 40,000-member workforce -- including 850 jobs in North America. In Houston, where BHI is headquartered and where it employs around 7,300 people, it plans to lay off around 200. More cuts, said BHI, could come if conditions don't improve.

With gas prices failing to match cold temperatures, the U.S. drilling rig count has fallen around 25% from its peak of 2,031 in early September, and energy analysts are in agreement that the rig count has to come down more before the market balances.

"We expect the count to continue to slide in the coming months, perhaps by another 400-plus rigs, given the extreme oil and gas price weakness," said analysts at CreditSights. Earnings for the majors are forecast to fall by 68%; for the independents, profits will be off around 48%, said CreditSights.

Several of the majors, including ExxonMobil Corp., Chevron Corp., ConocoPhillips and Royal Dutch Shell issued their earnngs numbers last week (see related stories). The independents' reports have begun, but many more are expected in the next couple of weeks.

"You are going to see some net earnings losses this year, there's no question of that," said BMO Capital Markets' Randy Ollenberger. "Fourth quarter results are going to be very, very weak. And they're a bit of a glimpse of the future because oil prices in the fourth quarter were better than they are today."

Ollenberger noted that oil prices averaged close to $59/bbl in the final three months of 2008 and "this industry didn't make any money. So at current oil prices, investors are going to be looking at these results and concluding they ought to be concerned."

Lower earnings and oil and gas reserves write-downs are expected to dominate some companies' reports, said Oppenheimer & Co.'s Fadel Gheit.

"We have been through the fat years," Gheit said. "Now we're going through the lean years." He expects earnings to be "dismal." Producers, he said, "are under pressure to cut costs. The sharp drop in oil and gas prices has tremendous far-reaching ramifications on the landscape."

Beyond 4Q2008 earnings, energy prognosticators are not too optimistic about this year.

Analysts at Barclays Capital, who have issued a semiannual "Original E&P Spending Survey" since 1982, are forecasting 2009 global E&P expenditures to contract 12% to $400 billion from $454 billion in 2008. The forecast was based on a survey of 357 oil and gas companies.

"This is a reversal after six years of global growth," wrote Barclays' James D. Crandall and his team. "Budgets are being cut in response to the significant decline in commodity prices, constrained cash flow and the tight credit markets.

"The sharpest decline in spending is expected to be in the United States, where 2009 E&P expenditures are indicated to drop 26% to $79 billion from $106 billion in 2008, by the 245 companies we surveyed. This would end a four-year upturn."

Likewise, Barclays estimated that Canadian E&P spending, based on a survey of 85 companies, would fall 23% to US$22 billion in 2009 from US$29 billion last year.

First Energy Capital's Martin King also is pessimistic about the prospects for North American producers.

"There is no comfort provided by this update as we expect that the [natural gas] price softness seen in the early stages of 2009 will extend throughout the calendar year," King, based in Calgary, wrote in a note to clients. "The weakness of natural gas prices that has transpired over the past couple of months has met and exceeded our worst fears." First Capital lowered its 2009 gas price estimate by $2 to $5/MMBtu and dropped 2010 gas price forecasts to $7.75/MMBtu from $8.50. "With our US$5/MMBtu price outlook for 2009, most supply basins in North America are simply uneconomic. Price weakness has now become firmly entrenched."

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