Shale Gas Boom a Double-Edged Earnings Sword
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There has been a surge in shale gas production in the United States, driven by techniques such as hydraulic fracturing (fracking), opening up deposits once considered too difficult and costly to exploit. The glut of shale gas in the U. S. has driven down prices to around $3.00 per million BTUs, after reaching a recent low of just below $2.00 per million BTUs.
This plunge in natural gas prices is certainly proving to be a major economic factor and not only on the energy market. It is a major factor – good and bad – in many companies' earnings, depending on which side of the market you are on, producer or consumer.
On the negative side, the obvious losers at the moment are the energy companies which are still producing far too much shale gas than the marketplace can bear. Take ExxonMobil (NYSE: XOM), for example. It jumped to the top among U.S. gas producers with its $41 billion 2010 purchase of XTO Energy. Its latest earnings report showed that Exxon's U.S. oil and gas earnings tumbled by 53 percent to $678 million due to the weakness in gas prices. Its CEO Rex Tillerson said in June that producers were “losing their shirts” in natural gas.
Another major energy company, Chevron (NYSE: CVX), suffered from similar woes. The company boosted its presence in the U.S. natural gas market last year when it purchased Atlas Energy last year for $3.2 billion. In its latest earnings report, Chevron reported its sales price for natural gas fell by 50 percent from a year ago to $2.17 per million BTUs. Shell came out with a similar number, stating that the price received for U.S. natural gas was 52 percent lower than last year.
Another sector drastically affected by the slump in natural gas prices is the U.S. coal industry, which has seen domestic demand for thermal coal drop sharply. Stocks in the Dow Jones U.S. Coal Index have cratered, falling over 40 percent so far this year. In fact, last week this index hit a four-year low. One company in the index, Arch Coal (NYSE: ACI), hit a 12-year low last week. It posted a second quarter loss, thanks largely to costs incurred shutting down unprofitable mines. Its CEO John Eaves said it had no plans to bring on additional thermal coal production for quite a while.
On the other hand, some sectors have greatly benefited from the glut in shale gas. Perhaps no sector more so than the U.S. petrochemicals industry. It now enjoys the second-lowest energy costs in the world, second only to Middle Eastern producers. The energy factor feeds through to the bottom line, as can be seen by the latest results from LyondellBasell Industries NV (NYSE: LYB). The company reported its costs to produce ethylene, a key chemical used in plastics production, fell by 46 percent in the United States during the second quarter thanks mainly to cheap natural gas. No surprise then that the stock is near its 52-week high, just the opposite story from Arch Coal.
Even though earnings at Dow Chemical (NYSE: DOW) were disappointing, it too will benefit from low natural gas prices. In February, the company announced it plans to spend nearly $4 billion over the next five years, building plants, to take advantage of cheap U.S. shale gas. This makes sense since every 10 cent drop in the cost of ethane boosts Dow's earnings by nearly $200 million.
Of course, this dream scenario for chemical companies and nightmare scenario for energy companies can change in the years ahead. But it will take a concerted efforts from the major producers like Exxon to stop drilling so many wells and curtail shale gas production. The low gas prices seen so far has begun to curtail production but not nearly enough yet to see a sustained upward move in price. It may take more pain for the gas producers to finally get the message.
tdalmoe has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Chevron. 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.