What company -- and what stock -- is the big winner from the plunge in oil prices from $148 a barrel in July to less than $43 a barrel on Dec. 19?
Hands down, the big winner is Exxon Mobil (XOM, news, msgs). I can't find another company so well-positioned for this slowdown and so prepared to take advantage of the current turmoil to increase its profits in the future.
For most individuals and companies, falling oil prices are a mixed blessing. That's because what the slowing global economy giveth in the way of falling demand for oil and lower energy prices it taketh away in the form of slumping sales and plunging profits. Almost all of us, for instance, are paying less to fill up the tank or to heat a house, which is great as long as the recession hasn't cost us our jobs. Airlines, to take an example from the business sector, are glad to see their fuel costs plunge, but they aren't exactly ecstatic about slumping passenger miles.
You'd think that in the energy sector, at least, it would be easy to pick the losers. Just throw a dart at the oil patch. Every oil and gas company has seen revenue fall along with commodity prices.
Not all will suffer equally
But even in the energy sector, some companies have been hurt worse by falling oil and natural-gas prices than others. For example, on Dec. 12 Credit Suisse cut its projections for 2009 earnings per share at Anadarko Petroleum (APC, news, msgs) by 57%, to 74 cents a share from a prior $1.71. In the same report, Credit Suisse cut its earnings projections for 2009 by just 26% for Ultra Petroleum (UPL, news, msgs) and 16% for Chesapeake Energy (CHK, news, msgs).Why the difference? Anadarko has one of the highest production costs among exploration and production companies. With higher costs, the company gets hurt proportionately worse than a company -- such as Ultra Petroleum -- that has lower production costs. All oil and gas companies hedge to protect themselves against falling prices for the oil and natural gas they produce, but some do more of it than others.
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It's an advantage when prices are falling but a disadvantage when prices are rising because a hedge -- a contract to sell future production at a price agreed upon in the present -- prevents the company from getting the full benefit of increasing prices. And some companies are better -- or luckier -- at locking in higher prices when they hedge. As of the third quarter of 2008, Anadarko had hedged only about one-third of its natural-gas production. Chesapeake Energy had hedged about 77%.
Chesapeake's bigger hedge takes on even more importance because the company's hedges had locked in an average price or $8.25 per million British thermal units. That's well above the Dec. 19 price of $5.64.
But it's not just changes in near-term revenue that differentiate oil companies right now. There's also the huge difference between companies that spent heavily to buy reserves and on high-cost exploration and production projects, and companies that sat on their hands while the oil-price boom turned into a speculative bubble. At a minimum, the companies that plunged in then now have a stable of projects that looked attractive when oil was at $120 a barrel and that now look like money losers with oil at $40 or $50 or $60 or maybe even $70 a barrel.
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For example at Suncor Energy (SU, news, msgs), one of the leaders in developing the vast potential of Alberta's oil sands, cash production costs rose to $34 Canadian (about $28 U.S. in today's dollars) per barrel in the third quarter from CA$25.10 in the second quarter. With oil prices falling, rising capital expenditures for new production facilities -- CA$4.9 billion -- pushed the company deep into the red for the first nine months of 2008. In that period, the company raised CA$2.6 billion in the debt market to stay cash-flow positive, but with the financial markets in chaos and raising capital still extremely difficult, the company decided to delay an expansion of its Project Voyageur upgrade. That will reduce production to 235,000 barrels a day from management's previous projection of 275,000 to 285,000 barrels a day.
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