Yesterday Chesapeake Energy, the second largest U.S. based oil and gas company, filed with the Securities and Exchange Commission to sell off its oilfield services unit which does the majority of the company’s oil and gas exploration, hydraulic fracking and drilling. Stung with high costs and mired in more than $20 billion in debt on its U.S. shale operations, the company continues to sell off billions in its assets base as it struggles to right itself. Its actions follow a developing trend of cutbacks, spin- offs, divestures and write downs for oil and gas majors operating in U.S. shale formations. In the last 10 days, British Petroleum, Chevron, ExxonMobil and Royal Dutch Shell have all announced they will be spending less on oil and gas exploration in the U.S. Allen Brooks, Managing Director of Parks Paton Hoepfl & Brown, an independent Houston, Texas based investment banking firm, stated yesterday, “Chevron is the latest major oil company to implicitly declare that the oil industry has entered a new era – one marked by higher costs and more disciplined capital investment programs,”.
Brooks further stated several of the majors have announced plans or are considering separating their North American shale gas operations into stand alone entities, possibly positioning their U.S. operations for sale over time. These new directions by the oil and gas majors are acknowledgements their energy returns on energy investments are becoming increasingly difficult and hampering their profits despite the initial high expectations for U.S. shale formations over the last several years.
In 2011 Shell earned roughly $28 billion in its upstream and downstream operations only to see this fall to below $20 billion in 2013. New Shell Oil CEO Ben Van Beurden recently told shareholders it was bad policy to spend an estimated $80 billion in capital on its North American portfolio and still lose money. Chevron has been cutting back on its level of drilling in the Pennsylvania Marcellus Shale while lowering its 2014 annual corporate production forecast by 6.1%. Early this month, British Petroleum CEO Bob Dudley announced all of BP’s U.S. operations would be formed into a separate business entity which, among other things, opens up the possibility of the sale of the new shale gas unit in the future. ExxonMobil spent $25 billion in 2010 to acquire XTO Energy Inc. forming it’s U.S shale gas operations. However industry analysts continue to report ExxonMobil’s XTO investment diluted its profits and isn't making up for the company's problems in increasing oil-and-gas production.
Investment banker Brooks is also raising the question as to where the oil and gas industry will continue to find the risk capital for exploratory drilling as the majors pull back on their spending. In the U.S. shale oil and gas formations, Brooks stated, “Onshore, for the past few years, a chunk of that capital has been supplied by private equity investors who have supported exploration and production teams in start-up ventures. Unfortunately, the results of the shale revolution have been disappointing, leading to significant asset impairment charges and negative cash flows,” He further asks, “Will that capital continue to be available, or will it, too, begin demanding profits rather than reserve additions and production growth?”
Also at stake are a number of high profile U.S. politicians who have staked, to a large degree, their upcoming reelection by campaigning on the claimed successes of the oil and gas companies operating within their state’s shale formation. One such politician seeking reelection this year is Pennsylvania’s Governor Tom Corbett who has been heavily touting what several leading Pennsylvanian labor economists believe are questionable job creation numbers in the state’s Marcellus Shale formation. Corbett has also offered Shell Oil more than $1.6 billion in state tax credits to locate and build an ethane refinery plant outside of Pittsburgh, Pennsylvania.
For more than 18 months Shell Oil has been unwilling to date to sign the record breaking state tax incentives agreements with Gov. Corbett and move ahead even as the governor continues to campaign on this issue. With Shell’s new CEO announcing a more than 20% cutback in its U.S. shale gas operations just last week, further doubt is now being cast on this deal.
While many cite the low price for U.S. natural gas as the main reason for the dismal financial performances of the oil and gas majors, natural gas prices have risen from an industry low of $1.72 per million BTU of gas in early 2012 to the $4.00 to $5.00 plus MBTU range over the last several months. Yesterday natural gas futures closed at $4.51 per MBTU.
To learn more about the investment banker Allen Brooks, go to: http://www.pphb.com/index.php/our-company
To learn more about Shell Oil, go to: http://www.shell.us/
To follow natural gas wholesale pricing, go to: http://www.bloomberg.com/energy/
Disclosure: The writer is not part of any environmental group or “anti-frackers” nor does he hold U.S securities stocks in any oil and gas drilling companies. He is not being paid to write by any group nor does he have any financial arrangements with any person or entity listed in this article.