The 3 Stooges of the Oil and Gas Industry

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Cabot Oil and Gas (NYSE: COG) represents a winning investment.  The stock keeps climbing despite high valuations.  Earnings gains are predicted for 2013.  It pays a dividend of … um ... let’s not go there.  Over the past year, the company stock rose 45%.  Despite low natural gas prices, Cabot still makes money for its investors.

If all oil and natural gas companies were so successful.

While oil and gas production boomed in the US, not all producers made money for their shareholders.  In this post, we’ll look at three notable disappointments in the oil and gas production business.

Kodiak Oil and Gas

Kodiak Oil and Gas (NYSE: KOG) has a simple and safe business plan: go to the Bakken shale formation and drill for oil, and go to the Green River Basin and drill for natural gas.  At the moment, the Williston Basin of the Bakken shale is the primary focus of Kodiak’s exploration activities.  Oil production, proven reserves of oil and gas, and revenues climb each year.  The company acquires more acres of land to explore.  So what’s the problem?  Earnings: despite record revenues, earnings haven’t kept pace.  Specifically, in Q1 2012 revenues hit a record $79.9 million and earnings were a penny a share.  Next quarter saw revenues come in at $85.8 million and earnings at $0.35 per share (now we’re talking).  Then in Q3 2012, revenues went to $128 million and earnings were … a penny a share.  Put another way, one year revenue growth was 287%, while earnings growth was nowhere close.

What happened?

Kodiak management pointed out there were significant expenses incurred that impacted earnings.  Indeed, the Williston Basin is reportedly an expensive place to drill for oil.  Unrealized losses due to hedging also factored in.  Consequently, the price of the stock declined 4.5% over the past year.  Perhaps more concerning is insider trading.  While painting a positive picture for the future, Kodiak executives jettisoned over 800,000 shares since late November 2012.  Have those in the know gotten out while the getting was good?  Inquiring investors want to know.

Sandridge Energy

It’s been said you shouldn’t kill a goose laying golden eggs.  Too bad Sandridge Energy (NYSE: SD) sold theirs.  Specifically, the company sold its stake in a Permian Basin oil play in order to finance oil exploration and production activities in the Mississippian Lime formations in Kansas and Oklahoma.  The stock dropped 9% in one day which, in turn, precipitated a lawsuit.  The class action suit alleges the company shocked the market when it sold its highest margin oil producing assets.  The lawsuit also alleges Sandridge had grossly misrepresented the proportion of oil to natural gas producing assets.  All of this wouldn’t be so bad if the Mississippian Lime play was a proven oil producer that matched or exceeded the income potential of the sold Permian Basin play.  While Sandridge believes its 2 million acres of Mississippian Lime will rival Bakken oil production, others point out that the lime contains too much natural gas to compete with the Bakken shale for oil production.

To be sure, there is growing hydrocarbon production in the Mississippian Lime.  However, I have been informed via personal email by the US EIA that the Mississippi Lime play is significantly smaller (by square miles) than the Bakken or Eagle’s Ford plays.  Future oil production is subject to debate and oil industry executives seem guardedly optimistic regarding profit potential.  For Sandridge, it basically sold known oil producing assets to buy oil assets it hopes will do well in the future.  No wonder the stock dropped 9% in one day.  With more lawsuits and investor revolts on top of uncertain oil production, I suspect Sandridge will continue to languish.  Did I mention the Sandridge CEO was paid more last year than the CEO of Chevron?

Chesapeake Energy

No list of energy company stooges would be complete without mention of Chesapeake Energy (NYSE: CHK).  The country’s largest natural gas producer decided to aggressively pursue natural gas and oil production back in 2007.  The debt incurred during this splurge proved disastrous.  Natural gas prices fell, revenue declined, and Chesapeake began selling assets to service its debt.  Along the line, investigations were launched into CEO and President Aubrey’ McClendon’s compensation and  potential conflicts of interest.  While removed as President and denied a bonus in 2012,  McClendon still serves as CEO despite his history of personal financial problems that could interfere with his duties at Chesapeake.  For all the efforts to service debt, the company’s stock declined in 2012 to levels not seen since 2004.  The company still pays a dividend, but that has taken a hit, too.

Can Chesapeake redeem itself in 2013?  According to the Street, the earnings decline begun in 2012 will likely continue in 2013.  Given the warm weather and subsequent low natural gas prices, Chesapeake’s earnings woes will not resolve anytime soon.  The debt situation needs continued attention on top of it all.  This company has hammered its shareholders, but hey, at least it’s a great place to work.

Final Foolish Thoughts

America’s domestic energy production opened the door for financial gains to millions of Americans.  While Cabot investors benefited, others suffered loss or opportunities lost due to mismanagement or poor business decisions.

  

 

That said, companies like Kodiak, Sandridge, and Chesapeake may still turn around and rub my nose in record earnings.  Right now, though, I’ll put my money somewhere else.


dylan588 has a position in Cabot Oil and Gas. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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