Exxon, Chesapeake, Shell Hit Hard – Can They Recover?

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With natural gas prices lower than in years past, and with oil’s price decrease, large energy firms have found themselves facing difficult times. 

Here is a snapshot of each firm’s troubles, and what I hope to see in order to turn profits around.

Chesapeake

With crushing debt, heavy capital expenditures, and lost profits, Chesapeake ) is a company on the mend.  Here is the data:

  • Chesapeake posted a $2.01 billion loss last quarter
  • It earned $2.97 billion in revenue, but spent $3.3 billion on drilling and asset purchases
  • Chesapeake’s cash flow fell 42% year over year
  • The company hedged its Q4 natural gas production but its hedge price is $3.06, 20% less than the spot price
  • Total debt rose to $16 billion
  • The company’s $922 million profit last quarter is largely the result of asset sales
  • Chesapeake wrote down natural gas holdings by $2.02 billion

ExxonMobil

A slip in production led to a loss for ExxonMobil ), the largest natural gas producer in the U.S.  However, the company did show some positive signs amid decreased profits.  Exxon’s results:

Negative Signs:

  • Revenue decreased 7.7%
  • Q3 Earnings fell 7.4%
  • Production dropped to the lowest level in three years
  • Exxon’s oil output slipped 7.5% to four million barrels per day Q3 of 2009 was the last time Exxon produced so little
  • Profits from exploration and production plummeted 29% to $5.97 billion, a result of lower gas prices and decreased production

Positive Signs:

  • Decreased production is a result of shifting rigs from natural gas regions to more profitable, oil-rich areas
  • In Q2, 50% of rigs were in “liquids rich,” oil areas, versus 67% in Q3
  • This bodes well for profits, as Exxon is scaling to ramp-up production in these areas
  • Profits from refining almost doubled

Royal Dutch Shell

Shell -A) did not fare much better.  The company’s data is as follows:

Negative:

Production slipped 1%

  • Profit from “clean current cost of supplies,” which does not include inventory nor non-operating profits and losses, dropped 6.3% in Q3 to $6.56 billion
  • Revenue decreased 8.4% to $115.43 billion

Positive:

  • Shell is shifting from gas production to the more profitable oil production
  • Shell’s net profit rose 2.3% to $7.14 billion

Turning Higher Profits

The oil giants are struggling to produce high volumes of product.  This is a negative sign for the firms, because a large chunk of their earnings come from the sale of commodities which are dependent on the market price. 

However, an optimistic cloud looms in the not-too-far future.  The giants have a few ways to increase profits in the coming quarters.

Increase drilling, decrease permit time With oil rigs now in place to drill for oil, I expect production to increase.  U.S. drillers could also get a major boost if Governor Romney wins November’s election.  Romney is in favor of chopping the time it takes to receive a drilling permit.  In 2005, it took 154 days for the average permit to drill on federal lands.  In 2011, that number doubled to 307, which caused a 40% drop in permits.  This will be a boost for Chesapeake, which must get oil production going to repay its debt.

Increase Exports Exxon, ConocoPhillips (NYSE: COP), and BP joined forces to sink up to $65 billion for drilling in Alaska’s North Slope.  To succeed, the companies need government permission to export to nations without a free trade agreement with the U.S.  While the firms hope to export to a variety of countries, where natural gas prices can be higher because they are linked to oil, they are focusing on Korea, Japan, China, and India.  To read more about this, see my previous post “Exports Fire up Miserably Low Natural Gas Prices.

Transport If the U.S. begins to export more natural gas, or to begin transferring energy throughout the U.S., one company is an obvious beneficiary.  Cheniere’s : LNG) proposed pipelines serve an estimated 75% of the U.S.’s average annual natural gas demand.  The move toward oil production is more profitable for oil companies and less so for Cheniere.  However, if the exports from ConocoPhillips, Exxon, and BP are allowed, and when Chesapeake starts fracking its shale areas again, the entire industry will see a lift.

Recovery

In all, the energy industry was hit hard by decreased gas prices and sinking oil prices.  However, last quarter’s results are a bump in the road, because the firms are ramping up production on oil-rich sites. 

Finally, if the firms receive favorable drilling regulation, their stock prices could jump as investors expect increased production and higher commodity prices overseas.


ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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