ExxonMobil's natural gas emphasis may hurt small US producers
By ISABEL ORDONEZ
ExxonMobil’s decision to leave its US natural gas output untouched despite low commodity prices may push some smaller producers out of the business, force consolidation in the industry and make the oil company an even more powerful force in the oil patch.
The biggest US natural gas producer puzzled some analysts and investors Tuesday when during its earnings report, it said it had no plans to curtail its output despite that a glut has driven the price of the commodity to its lowest level in more than a decade.
Other companies including Chesapeake Energy, the second-largest US natural gas producer, recently have announced drilling cutbacks as natural gas production in some areas becomes a money-losing business.
The Irving, Texas-based company argued although it is doing its best to switch drilling to oil-rich areas, it still needs to keep drilling for natural gas to meet previously agreed-to contractual terms that let it retain expensive land leases.
Raising some market observers' eyebrows, it also said drilling for natural gas in some areas is still profitable even at current prices.
Natural gas recently was trading at $2.53 per million British thermal units, sharply down from the nearly $14 per MMBtu it traded at in July 2008.
Regardless of the reasons behind the company's decision, some analysts noted Exxon's move has the potential to put smaller competitors out of business, contributing to a second-hand production decline and an eventual recovery for natural-gas prices in years ahead.
The decision could "drive out marginal operators, perhaps consolidate the industry and rationalize long-term production," Paul Sankey, an analyst at Deutsche Bank, said in a note to clients.
That could turn Exxon into the Wal-Mart of the US natural gas sector, he added, referring to the strategy of the world's largest retailer to keep sales prices lower than competitors' by reducing profit margins.
It is highly unlikely ExxonMobil's main motivation to keep the foot on the gas pedal is "to bankrupt" rivals in the natural gas sector, but intentionally or not the company's decision could put a strain on small rivals that can't compete with its deep pockets, Fadel Gheit, an analyst with Oppenheimer & Co., said.
"Small companies are learning that drilling next door to the world's largest oil company has consequences," Gheit said. "While they are scrambling with low natural-gas prices, Exxon is digging in its heels."
Natural gas companies such as Quicksilver Resources, Goodrich Petroleum or EXCO Resources - which are trying to turn themselves into oil companies - are among the most vulnerable, said Subash Chandra, an analyst with Jefferies & Co.
"Unfortunately, they are finding that doing the switch is expensive and that it takes a long time," Chandra said. "They may need to merge between themselves or try to get a buyer in order to survive because this is not a sellers' market for natural gas producers.”
ExxonMobil spokesman Alan Jeffers said the company's decision to keep drilling for natural gas is a response to the company's "positive long-term view" of natural gas markets.
"Our conclusion remains that natural gas is expected to be one of the fastest-growing demand segments, despite the near-term supply-and-demand situation," he said.
Faced with the possibility of a longer period of depressed natural-gas prices due to unchanged production from giants such as Exxon, smaller companies will continue to switch their drilling rigs toward oil-liquid areas to avoid going out of business, Jeff Eshelman, spokesman for the Independent Petroleum Association of America, said.
The organization represents thousands of independent oil-and-gas producers across the US.
Other analysts don't think Exxon's decision will greatly influence the natural gas market despite the company being the biggest kid on the block in the US natural gas business.
"The number of rigs it has running is not enough to significantly influence the market," Jason Gammel, an analyst with Macquarie Capital, said.
Gammel estimated about 30 of the 70 drilling rigs Exxon said it plans to run across US shale areas this year are focused on natural gas production.
"That is a small number to really affect supply to the degree that will change prices," Gammel said.
There were more than 700 rigs drilling for gas in the US as of last week, according to Baker Hughes.
Gammel noted Exxon may have other motivations to keep drilling for gas. Unlike shale pioneers such as Chesapeake that already have mastered the development and production of shale gas and now are switching to oil, Exxon needs to keep learning.
The company said Tuesday a significant part of its drilling is aimed at understanding the geology of the properties it acquired in 2010 when it paid $25 billion for XTO Energy.
The oil giant also needs to utilize the many engineers that came with the acquisition.
"Certainly Exxon's cash flow is very robust and it will keep drilling to keep them busy," Gammel said.
Dow Jones Newswires
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