Natural Gas Drillers Can’t Catch a Break : Bloomberg News

Natural gas drillers who flocked to liquids-rich basins in search of better profits just can’t seem to catch a break.

Seven years ago, as shale output surged and gas futures tumbled more than 60 percent, producers abandoned reservoirs that only yielded gas and moved rigs to wells that also contained ethane, propane and other so-called natural gas liquids, or NGLs. These NGL prices were tied to oil futures, which climbed in 2009 as the economy recovered. It was a strategy that worked well — for a while.

Drillers fled natural gas for oil and liquids as commodities collapsed.
Drillers fled natural gas for oil and liquids as commodities collapsed.

Those days are over. Oil has plunged 56 percent from a year ago, and propane at the Mont Belvieu hub in Texas has tumbled 64 percent. The spread between NGL prices and natural gas shrank 9.2 percent last week to $7.02 a barrel, the lowest in at least two years, squeezing producers’ profits.

The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers' profits.
The spread between natural gas liquids and natural gas prices has narrowed, squeezing producers’ profits.

The culprit is a repeat offender: shale production. This time, the boom in oil output from reservoirs like the Bakken in North Dakota has created a glut of NGLs, and the market is poised to remain well supplied. To survive, gas producers will have to focus on the lowest-cost wells.

Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.
Production of natural gas liquids has surged, creating a glut as drillers flee dry gas.

“Drillers are going to have to retreat to where the sweet spots are,” said Bob Yawger, director of the futures division at Mizuho Securities USA Inc. in New York. “At these price levels, the rig count isn’t going to move higher.”

 

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Trading Alert : Oil Sector Is Not Yet At The Bottom

 

“This is the beginning, not the end, of the write-down process,” Paul Sankey, an energy analyst at Wolfe Research LLC, said on Bloomberg TV on Friday. “The biggest concern is that we’ll see weaker demand over the second half of the year.”

Exxon Mobil Corp. and Chevron Corp., the biggest U.S. energy producers, hunkered down for a prolonged stretch of weak prices after posting their worst quarterly performances in several years.

Exxon reported its lowest profit since 2009 as crude prices fell twice as fast as the world’s largest crude producer by market value could slash expenses. Chevron recorded its lowest profit in more than 12 years after the market rout forced $2.6 billion in asset writedowns and related charges.

Stung by the worst market collapse since the financial crisis of 2008, oil explorers are slashing jobs, scaling back drilling, canceling rig contracts and reducing or halting share buybacks to conserve cash. Chevron said the slump convinced it to lower its long-term outlook for crude prices.

“This is the beginning, not the end, of the write-down process,” Paul Sankey, an energy analyst at Wolfe Research LLC, said on Bloomberg TV on Friday. “The biggest concern is that we’ll see weaker demand over the second half of the year.”

Exxon cut share repurchases for the current quarter in half to $500 million after net income fell to $4.19 billion, or $1 a share, from $8.78 billion, or $2.05, a year earlier, the Irving, Texas-based company said in a statement on Friday. The per-share result was 11 cents lower than the average estimate of 20 analysts in a Bloomberg survey.

For Exxon, refinery profits fattened by lower costs for crude were more than offset by weaker results in the company’s primary business, oil and natural gas production, Exxon said. The company’s U.S. wells posted a $47 million loss.

Spending Cuts

Exxon reduced spending on major projects like floating crude platforms and gas-export terminals by 20 percent to $6.746 billion during the quarter, according to the statement. International crude prices fell 42 percent from the previous year to an average of $63.50 a barrel.

Chevron’s profit dropped to $571 million, or 30 cents a share, from $5.67 billion, or $2.98, a year earlier, the San Ramon, California-based company said in a statement. The per-share result was well below the $1.16 average estimate.

Chevron’s biggest business unit — oil and gas production – – posted a loss as the second-largest U.S. energy company recorded a $1.96 billion writedown on assets and another $670 million charge for taxes and projects suspended because they no longer make economic sense.

“The write-downs will get worse into the end of the year as companies complete their end-of-the-year SEC filings,” Sankey said. “The market still looks very over-supplied with oil and we’re in peak demand season globally.”

Pessimistic Outlook

Exxon Chairman and Chief Executive Officer Rex Tillerson was among the first oil-industry bosses to shrink spending as the crude rout began taking shape more than a year ago. After cutting the budget by 9.3 percent in 2014, this year’s reduction may exceed the original 12 percent target, the company disclosed during an April 30 conference call with analysts.

Tillerson, an Exxon lifer whose 10th year as CEO began in January, has been pessimistic about the prospects for an imminent oil-market rebound. On April 21, he told a Houston energy conference that the supply glut and low prices will persist “for the next couple of years” at least.

Those remarks proved prophetic: international crude prices that rose 45 percent between Jan. 13 and May 6 have since tumbled 21 percent, inaugurating the second oil bear market in 14 months.

“Chevron was a disaster; Exxon was a disappointment,” Fadel Gheit, an analyst at Oppenheimer & Co. In New York who rates the shares of both the equivalent of a hold and owns each. “A rising tide lifts all ships, but when the tide goes down, all ships go down.”

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Linn Energy : Motley Fool Review

LINN Energy LLC’s Earnings Are Full of Surprises
LINN Energy LLC and LinnCo LLC both ax their monthly distribution to conserve cash.

Linn Energy Llc Permian Tall
SOURCE: LINN ENERGY LLC

With the price of crude taking a second leg down over the past few weeks, it’s forcing oil companies to take a hard look at their future plans. Hard choices are also being made with LINN Energy LLC (NASDAQ:LINE) and affiliate LinnCo LLC (NASDAQ:LNCO) now making the difficult choice to suspend monthly cash distributions as a means to conserve cash as the downturn persists. But that was just one of the many surprises LINN Energy and LinnCo unveiled to investors in their second-quarter report.

Surprise! We’re axing the distribution
After first halving the payout earlier this year, LINN Energy and LinnCo are now suspending it indefinitely. In commenting on the move in the earnings release, CEO Mark Ellis had this to say:

After careful consideration, management has decided to recommend to the Board of Directors that it suspend payment of LINN’s distribution and LinnCo’s dividend at the end of the third quarter 2015 and reserve approximately $450 million in cash from annualized distributions. The Board and management believe this suspension to be in the best long-term interest of all company stakeholders.

As Ellis points out, the move is being made to preserve cash as LINN will save $450 million over the next year by not paying distributions. It’s money the company can use to fix its balance sheet, which has come under a lot of pressure due to persistently weak oil and gas prices. While this is a very unpleasant surprise, in all honesty it’s a prudent move given how worried investors have grown over its debt-laden balance sheet.

Surprise! We’ve buying our bonds hand over fist
The second surprise is actually directly related to that balance sheet as the company announced it was taking advantage of investor fears to buy back a huge slug of its debt at a hefty discount. Over the past month, the company has repurchased $599 million of its outstanding senior notes for a total of $392 million, or a 35% discount to par value. This is actually a really great use of capital as LINN is basically earning a 50% return on its investment in buying back these bonds at such a discount.

With those repurchases, LINN has now reduced its debt by $783 million year to date, which will save it $54 million in annual interest payments. That’s a meaningful reduction in debt for the company and this isn’t likely the last of the debt repurchases as CFO Kolja Rockov hinted in the press release of “potential future repurchases.”

Surprise! We had better cash flow and production during the quarter
Another positive surprise was the company’s operational results for the quarter, which trounced its guidance. The company had expected to produce 1,100-1,220 MMcfe/d during the quarter but actually produced 1,219 MMcfe/d, which was 1.5% higher than the second quarter of last year. Further, as a result of production right at the high end of its guidance range, the company is now able to boost its full-year production guidance by 4% given what it sees on the horizon.

In addition to this, LINN Energy produced $71 million in excess cash flow for the quarter, which was a surprising bounty given that the company was expected to have a shortfall of $20 million for the quarter. The biggest driver here, aside from the higher than expected production, was a vast improvement in expenses. Overall, the company was able to reduce its lease operating expenses by 18% year over year.

The company expects these cost reductions to continue as LINN is reducing its full-year operating expense outlook by 6%, which will drive further improvement in cash flow. Overall, the company is expecting to pull a total of $225 million out of its overall cost structure as a result of interest savings and expense reductions.

Investor takeaway
There’s no way to sugarcoat things: The distribution and dividend cuts from LINN Energy and LinnCo sting. But given the persistent weakness in oil and gas prices it’s really the right move for the company to make until there’s a bit more clarity on prices. On a more positive note, the company did make significant progress on debt reduction and its operational results were actually quite good. That being said, LINN Energy and LinnCo have a lot of work to do considering the abundance of debt and no distributions to give investors a reason to keep holding.

For investors looking to limit risk, here’s a list of U.S. shale-oil producers with market values of at least $50 million and share prices above a dollar as of Friday’s close with the highest ratios of debt to equity:

Company Ticker Debt – most recent quarter-end ($mil) Total equity ($mil) Debt/ equity Total return – November Total return – YTD
Ultra Petroleum Corp. UPL,-6.55% $3,426.000 $5.198 65,910% -13% -8%
Midstates Petroleum Co. MPO,-0.38% 1,669.150 $334.277 499% -23% -65%
Memorial Resource Development Corp. MRD,-0.32% $2,111.800 $436.278 484% -20% N/A
Isramco Inc. ISRL,-2.55% $112.712 $26.740 422% 7% 10%
Jones Energy Inc. Class A JONE,-5.25% $770.000 $182.937 421% -18% -30%
Exco Resources Inc. XCO,-9.85% $1,549.439 $427.042 363% -4% -43%
PetroQuest Energy Inc. PQ,-2.80% $422.500 $130.059 325% -21% -14%
Goodrich Petroleum Corp. GDP,-5.20% $609.464 $214.587 284% -27% -64%
Linn Energy LLC LINE,-25.93% $12,310.146 $4,932.133 250% -26% -35%
Halcon Resources Corp. HK,-2.91% $3,533.852 $1,517.866 233% -27% -41%
Total returns assume dividends are reinvested. Source: FactSet

Memorial Resource Development Corp. completed its initial offering in June, priced at $19 a share, for a total return of 14% through Friday’s close at $21.60.

Morgan Stanley Oil Warning: The Crash / Glut Continues

Morgan Stanley has been pretty pessimistic about oil prices in 2015,

drawing comparisons to the some of the worst oil slumps of the past three decades. The current downturn could even rival the iconic price crash of 1986, analysts had warned—but definitely no worse.

This week, a revision: It could be much worse

Until recently, confidence in a strong recovery for oil prices—and oil companies—had been pretty high, wrote analysts including Martijn Rats and Haythem Rashed, in a report to investors yesterday. That confidence was based on four premises, they said, and only three have proven true.

1. Demand will rise: Check 

In theory: The crash in prices that started a year ago should stimulate demand. Cheap oil means cheaper manufacturing, cheaper shipping, more summer road trips.

In practice: Despite a softening Chinese economy, global demand has indeed surged by about 1.6 million barrels a day over last year’s average, according to the report.

2. Spending on new oil will fall: Check 

In theory: Lower oil prices should force energy companies to cut spending on new oil supplies, and the cost of drilling and pumping should decline.

In practice: Sure enough, since October the number of rigs actively drilling for new oil around the world has declined by about 42 percent. More than 70,000 oil workers have lost their jobs globally, and in 2015 alone listed oil companies have cut about $129 billion in capital expenditures.

3. Stock prices remain low: Check 

In theory: While oil markets rebalance themselves, stock prices of oil companies should remain cheap, setting the stage for a strong rebound.

In practice: Yep. The oil majors are trading near 35-year lows, using two different methods of valuation.

4. Oil supply will drop: Uh-oh 

In theory: With strong demand for oil and less money for drilling and exploration, the global oil glut should diminish. Let the recovery commence.

In practice: The opposite has happened. While U.S. production has leveled off since June, OPEC has taken up the role of market spoiler.

OPEC Production Surges in 2015

Source: Morgan Stanley Research, Bloomberg

For now, Morgan Stanley is sticking with its original thesis that prices will improve, largely because OPEC doesn’t have much more spare capacity to fill and because oil stocks have already been hammered.

But another possibility is that the supply of new oil coming from outside the U.S. may continue to increase as sanctions against Iran dissolve and if the situation in Libya improves, the Morgan Stanley analysts said. U.S. production could also rise again. A recovery is less certain than it once was, and the slump could last for three years or more—”far worse than in 1986.”

“In that case,” they wrote, “there would be little in history that could be a guide” for what’s to come.

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Cramer Rates Chesapeake Energy : SELL SELL SELL

Our favorite AVOID gets a celebrity endorsement:

Chesapeake Energy is an oil and natural gas company based in Oklahoma City with positions in the Eagle Ford, Utica, Granite Wash, Cleveland, Tonkawa, Mississippi Lime, and Niobrara unconventional liquids plays.

TheStreet Ratings team rates CHESAPEAKE ENERGY CORP as a Sell with a ratings score of D. TheStreet Ratings Team has this to say about their recommendation:

“We rate CHESAPEAKE ENERGY CORP (CHK) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company’s weaknesses can be seen in multiple areas, such as its deteriorating net income, disappointing return on equity, weak operating cash flow, generally disappointing historical performance in the stock itself and feeble growth in its earnings per share.”

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income has significantly decreased by 979.8% when compared to the same quarter one year ago, falling from $425.00 million to -$3,739.00 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Oil, Gas & Consumable Fuels industry and the overall market, CHESAPEAKE ENERGY CORP’s return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has significantly decreased to $423.00 million or 67.23% when compared to the same quarter last year. In addition, when comparing the cash generation rate to the industry average, the firm’s growth is significantly lower.
  • Despite any intermediate fluctuations, we have only bad news to report on this stock’s performance over the last year: it has tumbled by 59.08%, worse than the S&P 500’s performance. Consistent with the plunge in the stock price, the company’s earnings per share are down 1159.25% compared to the year-earlier quarter. Naturally, the overall market trend is bound to be a significant factor. However, in one sense, the stock’s sharp decline last year is a positive for future investors, making it cheaper (in proportion to its earnings over the past year) than most other stocks in its industry. But due to other concerns, we feel the stock is still not a good buy right now.
  • CHESAPEAKE ENERGY CORP has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, CHESAPEAKE ENERGY CORP increased its bottom line by earning $1.83 versus $0.68 in the prior year. For the next year, the market is expecting a contraction of 109.8% in earnings (-$0.18 versus $1.83).
  • You can view the full analysis from the report here: CHK Ratings Report

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Energy Investors Cling To False Hopes : The Lost Decade

It has been a very challenging time for investors in the energy space, but we find their resiliency impressive, considering they have endured a decade of little to no returns.

Oil companies say there will be a price to pay — a much higher price — for all the cost cutting being done today to cope with the collapse in the crude market.

Investors haven’t made any money over the past decade with the S&P TSX Capped Energy Index gaining a paltry 0.3 per cent annually while the Canadian dollar-adjusted West Texas Intermediate oil price is up only 0.7 per cent per year. This compares to the S&P TSX Index that has gained just over seven per cent per year over the same period.

Even though it remained fairly flat over the past 10 years, the energy index has experienced tremendous volatility with an average standard deviation of 30 per cent, more than double the TSX’s 14 per cent.

It is doubtful that many investors rode out the entire period, instead we think they pulled the ripcord during some of the periods of excess volatility. It’s even worse for those who purchased at its recent peak in mid-2014.

Which is why we find it rather amazing that investors plowed a whopping $5.5 billion into the Canadian exploration and production sector through bought-deal equity financings in the first quarter, and an additional $1.4 billion raised so far this quarter.

Which is why we find it rather amazing that investors plowed a whopping $5.5 billion into the Canadian exploration and production sector through bought-deal equity financings in the first quarter, and an additional $1.4 billion raised so far this quarter.

FP0623_TotalReturns_C_JR

Looking Ahead

With regards to oil prices, we think there could more downside than upside on the horizon especially in this environment of a prolonged global supply-demand imbalance.

On the positive side, global oil demand has been improving and is up 1.2 per cent from last May. However, this may not be enough as global supply has exceeded demand for the past five quarters and could soon see the longest glut since 1985, according to financial news provider Bloomberg.

Not helping matters is OPEC production growth as the group aims to protect its market share against North American producers that have yet to curtail output despite the oil price being halved in the past year. Over the past four weeks the Lower 48 oil production has averaged 229,000 barrels a day higher than the previous four weeks.

With regard to Canadian oil producers, many companies have implied commodity prices at or near the forward curve and some a little bit higher such as Suncor Energy Inc. and Canadian Natural Resources Ltd.

 

We find this to be a useful exercise at times as a large divergence or disconnect either way can be indicative of a sector bottom like in mid-2012 or the peaks of early 2011 and mid-2014.

But today’s signals suggest more uncertainty and are creating a very challenging environment to make an investment decision in.

The bad news is that this may mean we have not yet seen the final capitulation usually needed before the start of a new bull cycle.  This is because high CAD-denominated forward prices, low interest rates and the large capital flow into the sector are providing an artificial sense of hope for marginal producers.

That said, there are still opportunities in the sector, but one has to work extra hard to mitigate the risks of uncertainty.

We continue to stay away from Alberta oil and gas producers as there is still way too much jurisdictional uncertainty. They could under perform like they did during the last royalty review and as a result have a higher cost of capital.

Instead, we look to own those well-funded, non-Alberta producers such as Crescent Point Energy Corp. that are looking to gain market share in this challenged environment.

Read more on protecting your portfolio and capital at hignnetworth.wordpress.com

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