Nothing like a good old fight between major corporations.
Remember Mitt Romney’s famous words during the last presidential campaign? “Corporations are people too, my friend.” Well, rest assured I’m not here to discuss the degree of humanity of corporations. But maybe Romney was on to something: Corporations do sometimes embody the zeitgeist of their time and place. What could at first be dismissed by some as nothing more than a petty clash between corporations over conflicting business interests might, in fact, be hiding a much deeper issue beneath the surface. The issue at stake could even be the future of the United States.
Ok, after this John Le Carré intro, let me rewind for a second and introduce you to the fighters. Picture in your head a boxing ring. In the right-hand corner, The Dow Chemical Company (NYSE:DOW). Three weeks ago, Dow pulled out of a limited partnership with Freeport LNG, a Texas export terminal that is asking for federal permission to cool shale gas into Liquefied Natural Gas (LNG), so that it could transport it overseas and sell it in foreign markets. The Dow Chemical Company (NYSE:DOW) is vehemently opposed to the project because it believes that LNG exports will lead to lower natural gas supply at home, therefore higher prices, which in turn would compromise its future construction of domestic chemical plants and hurt its bottom line.
In the other corner, the Mike Tyson of all corporations, the heavyweight champion of the S&P 500, the one and only Exxon Mobil Corporation (NYSE:XOM). What does Exxon want? In plain English, it wants unlimited U.S. natural gas exports. The Texas-based multinational insists that exporting shale gas to overseas markets will create so much profit for American companies that it will outweigh all of the negatives of a potential price increase at home. Exxon’s views on the matter are now backed by the Department of Energy, which published a report in December that concluded that LNG exports would offset the costs from higher domestic energy prices, and benefit the US economy overall.
What is at stake for America?
Dow’s financial position has been in a bit of a jam lately. Profit margins have declined. Its EPS is now 75% lower than 2008 levels, and the stock price has gone nowhere since early 2010. The company was in the process of restructuring and moving its business to Asia on a massive scale in order to improve its bottom line, but then the horizontal hydrofracking, or fracking, revolution came as fresh summer rain to the chemical giant. Greater natural gas supply means cheaper energy and lower production costs. Dow sees its future in using the shale gas boom to boost domestic projects, not for exports that would raise domestic natural gas prices. Thus, the company is very much in sync with a majority of Americans, who also believe that the main use of the shale gas boom should be to provide the U.S. with inexpensive energy that would be a catalyst to a job-creating manufacturing revival at home.
Fair enough, but let’s listen to what Exxon has to say.
Its position is based on pragmatism and free markets theory. It goes like this: the shale gas revolution was so sudden, and increased inventories at such a high speed, that natural gas prices collapsed, losing over 85% of their value between 2008 and 2012. The Henry Hub spot price bottomed around $1.80 per million BTU in May 2012, the lowest price in its recorded history in inflation adjusted dollars- though it is now back to $3.40 per million BTU. But after the boom comes the bust, and while America was rejoicing in shale gas heaven, nobody paused to notice a major flaw: How could these prices last forever when those who were putting all the money, and taking all the risks to make it possible -the investors- were also the ones who would be the least benefited by low gas prices caused by this overcapacity?
I believe this is the point that Exxon Mobil Corporation (NYSE:XOM) is trying to raise. Natural gas prices fell so much, that the whole situation became a boon for consumers such as Dow, but a bane for gas companies. It’s continued throughout 2012.
Do American shale gas exports have a future?
Unlike crude oil, the natural gas market is not globalized. Natural gas is an extremely difficult and pricey commodity to export. This explains why natural gas prices have plummeted in the US, while in Europe it sells for $10; in Japan for $17; and across Asia for up to $20. Shale gas resources elsewhere in the world have not yet been developed to the same extent as in the US, thereby creating a sustainable arbitrage opportunity for major American energy corporations such as Exxon and Chevron Corporation (NYSE:CVX).