A Surprising Winner From the Natural Gas Boom: Chesapeake Energy Corporation (CHK), EXCO Resources Inc (XCO)

Page 1 of 3

Low natural gas prices have proved to be a major burden for energy companies that derive a substantial portion of their revenue from the out-of-favor commodity. Over the past year or so, most exploration and production companies have curtailed gas drilling and shifted their focus toward oil and natural gas liquids, which are more profitable.

But one subsector within the energy industry has actually benefited handsomely from the depressed state of the natural gas market – the refiners.

Chesapeake Energy Corporation (NYSE:CHK)America’s natural gas boom
Recent advances in drilling technology applied to unconventional shale reservoirs have helped ignite what many have termed a “shale gas revolution.” Domestic production has risen steadily, from 19.3 trillion cubic feet (tcf) in 2007, to 20.6 tcf in 2009, to a whopping 22.9 tcf in 2011 – an all-time record. According to recently released data from the U.S. Energy Information Administration, production last year likely surpassed the 2011 record, with some sources estimating year-end production coming in at 24 trillion cubic feet.

Booming production from sources like Pennsylvania’s Marcellus Shale and Texas’ Barnett Shale has led to a massive oversupply of natural gas, contributing to severely depressed prices over the past couple of years. Last year, for instance, natural gas spent the entire first half of the year under $3 per thousand cubic feet (mcf), though it rose above that level in the latter half of the year.

Since most gas wells are uneconomical at under $3 per mcf gas, energy companies exited gas drilling in droves last year. For instance, EXCO Resources Inc (NYSE:XCO) cut its rig count in the Haynesville and Marcellus Shales – both prominent natural gas plays – from 18 and four, respectively, as of year-end 2011 to just five and one as of the third quarter 2012.

Chesapeake Energy Corporation (NYSE:CHK) , the second-largest natural gas producer in the country, also drastically reduced its gas-directed rig count, which stood at less than 10 as of the third quarter, down from nearly 90 in early 2011.

And Linn Energy LLC (NASDAQ:LINE) pretty much went whole hog on a highly prolific oily play, known as the Hogshooter, where it maintained eight rigs as of the third quarter, with wells posting staggering average initial production rates of around 2,100 barrels per day of oil.

With these and other energy producers turning to liquids drilling, it should come as no surprise that the total number of rigs drilling for natural gas in the U.S. fell precipitously over the course of last year, plunging by almost half. While low prices proved to be a major burden for gas producers, cheap natural gas turned out to be a major boon to refining companies.

Refiners’ changing fortunes
Geographically advantaged refining companies were big winners last year, profiting from the wide difference between the price of domestic oil and the price of global oil. Essentially, they were able to purchase cheaper domestic crude oil while selling the refined product at much higher, globally determined prices.

Fourth-quarter earnings among some of the top dogs in the sector were nothing short of spectacular. Valero Energy Corporation (NYSE:VLO) posted earnings of $1.01 billion, the highest in seven years, and up significantly from just $45 million in the year-ago period. Marathon Petroleum Corp (NYSE:MPC) reported earnings of $755 million, a drastic reversal from its $75 million loss in the same quarter last year.

Page 1 of 3
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Biggest Airports in the World

The 5 Most Gang Infested Cities In America

The 34 Smartest Countries in the World

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!