[ANALYSIS] Fiscal cliff’ could be too steep for many energy producers


By Saqib Rahim

E&E Publishing

If the United States falls over the “fiscal cliff,” more than a few energy producers will wish for a parachute, according to an analysis released last week by investment bank Credit Suisse.

While the analysis sees a serious economic collapse as “unlikely but technically possible,” such a “blow to the economy would be severe and almost certainly recession-inducing,” the team of Credit Suisse analysts wrote last week.

If the collapse were as serious as the economic crash of 2008, the gross domestic product would fall steeply, analysts said. Oil prices would fall in response: The Brent price could stoop as low as $60 per barrel before rebounding to the $80 range by the end of 2013. (Credit Suisse’s baseline case is that oil “muddles through” at $102 per barrel in 2013.)

Under $80 oil, Credit Suisse said, the largest energy producers would see their earnings per share, a common measurement of profitability, fall up to 26 percent in 2013.

Depending on where a company is in its development, it may or may not be able to absorb that blow, said energy analysts led by Edward Westlake.

For example, at Chevron Corp., earnings per share could slide as much as 28 percent; at Occidental Petroleum Corp., the worst-case scenario is a 22 percent drop. But even if $80 oil reduced their earnings, Westlake and his colleagues said, these firms would remain profitable enough to enjoy positive cash flow and clean balance sheets.

Not so for others. Hess Corp., which is on a five-year transition to become a leaner, more profitable company, would be caught off-balance by $80 oil. Credit Suisse estimated earnings per share could fall up to 55 percent in 2013.

Part of the issue is the cost of transition. To move into higher-value oil and gas plays, such as the Bakken and Utica shales, Hess has rolled out large capital budgets each year. Last month, it even increased its 2012 capital plan from $6.8 billion to $8.5 billion (EnergyWire, July 26).

If oil prices dive in 2013, Hess would have to borrow cash to sustain its capital budget, Westlake and colleagues said in a June note. To avoid this risky and expensive strategy, the analysts said, Hess may need to trim the budget to live closer to its means.

Another major oil producer, EOG Resources Inc., could also face trouble under $80 oil; its earnings per share could fall up to 63 percent in 2013, Credit Suisse said last week.

Wall Street analysts — and shareholders — have generally applauded EOG’s transition into the oil business. Still, if oil prices fall, its capital budget of $7.7 billion for 2013 may be difficult to sustain.

EOG has attempted to limit how much it borrows, Westlake and his co-authors said. But with lower oil prices, earnings will suffer and the company will face a choice: Borrow more to finance the capital budget, or cut it by a savage $3 billion.

One option that is now off the table for most energy producers: switching to a different, higher-priced commodity.

“Were oil to fall, there would be nowhere to hide. Gas and [natural-gas liquid] prices are already low,” Westlake said in an email.

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August 2012