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
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The 10 Largest Pharmaceutical Companies In the World

The 10 Most Expensive Android Apps

The 9 Most Expensive Designer Bags in the World

The 7 Most Expensive Real Estate in the World

The 10 Most Expensive eBay Items Ever Sold

The 10 Most Expensive iPhone Apps

The 9 Most Expensive Designer Shoes in the World

The 10 Most Expensive Cigarette Brands

The 10 Most Expensive Law Schools in the US

The 10 Best Wall Street Movies

The 10 Most Expensive Golf Clubs Ever Sold

The 10 Most Expensive Golf Memberships

The 10 Best Disney Characters Ever Created

The 8 Best Foods for Gaining Weight

The 10 Most Expensive Colleges in the World

The 7 Most Memorable Ad Campaigns of All Time

The 7 Most Expensive High Schools in the World

The 10 Electric Vehicles with the Longest Range

The 10 Cities with the Worst Drivers in the World

The 10 Most Expensive Dresses Ever Created

10 Islands to Visit Before You Die

10 Famous Celebrities Who Needed Rehab

The 15 Countries with the Largest Oil Reserves

The 10 Most Overused Excuses in the World

The 5 Best iOS Apps You Can’t Get on Android

5 Companies Damaged By Social Media Blunders

The 10 Most Legendary Blues Songs

The 10 Most Lawless Places in the World

4 Reasons China is a Threat to the US

The 17 Most Sugary Drinks in the World

The 10 Most Ruthless Rulers in History

The 10 Greatest Generals in History

Top 8 Travel Destinations for 2015

The 10 Safest Dog Breeds for Children

The 10 Most Stolen Vehicles in the US

The 7 Most Expensive Celebrity Weddings

The 10 Best LoL Teams in the World

Top 10 Worst Marketing Campaigns Ever Produced

Top 5 Diets that Help You Lose Weight

The 10 Best Ways to Stay Awake

7 Artists That Switched Musical Genres

The 10 Most Expensive Cities to Live in New Jersey

The 10 Best High Schools in New York

The 10 Countries With the Least Gender Inequality

The 6 Biggest Musician-Manager Feuds

The 10 Countries with the Cheapest Gas Prices

The 7 Most Theatrical Bands of All Time

The 8 Worst Band Breakups of All Time

The 10 Most Important South American Leaders

The 7 Most Successful Casting Show Winners

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!