The return on equity (ROE) for North American natural gas-weighted producers declined year/year in 2012, according to an analysis by the Energy Information Administration (EIA), news that’s been borne out in exploration and production (E&P) earnings results.
The ROE measures a corporation’s profitability by measuring how much profit is generated with the money that shareholders have invested. It’s a general indication of a company’s efficiency; investors often want companies with high ROEs that are growing.
According to NGI research, Chesapeake Energy Corp.’s ROE at the end of 2012 was negative 4.99%, but at the end of 2011, the ROE was 13.76%. Encana Corp.’s ROE at year-end 2012 was negative 40.3%, versus 0.03% at year-end 2011. Devon Energy Corp.’s was negative 0.95% at the end of last year, compared with 22.96% at the end of 2011.
EIA researchers used company financial data and a database compiled by UK-based consultant Evaluate Energy to review information from 60 E&Ps with “at least” 80% of their production in the United States and Canada, and production levels that exceeded 10,000 boe/d. The sampled companies accounted for nearly half of U.S. and Canadian oil and gas production in 2012.
“Producers with lower proportions of liquids in their total oil and gas production generally had lower ROE in 2012 compared to 2011, and compared to producers with higher proportions of liquids,” researchers said. “Wide differences in natural gas and oil prices affected the bottom line for upstream operators and shaped their decision making about where and how to deploy capital.”
Last year “wholesale natural gas prices in the United States and Canada fell to their lowest levels in a decade,” EIA said. “Crude oil prices, on the other hand, remained at historically high levels.”
Key findings from the survey indicated that E&Ps with liquids accounting for more than 80% of production had the highest ROEs in 2011 and 2012. Producers whose primary business is in North America with less than 40% of output weighted to liquids averaged negative ROEs in 2012. Those with 40% or more had positive returns. EIA found that ll producers reviewed averaged positive ROEs in 2011, when Henry Hub spot prices were 45% higher, or about $4.00/MMBtu on average.
Executives of large and small E&Ps that focus on North America have indicated that they plan to devote only a small part of their capital spending this year to dry gas drilling after suffering losses in 2012, shifting instead to more oily targets, including ExxonMobil Corp., the largest U.S. gas producer, as well as Chesapeake, Devon and Encana.
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