Cheap U.S. natgas a double-edged sword for company earnings

July 27 Fri Jul 27, 2012 3:43pm EDT

July 27 (Reuters) - The glut of shale gas in the United States has been a double-edged sword for earnings this week, cutting into profit for producers such as Exxon Mobil and Chevron, but benefiting chemicals makers and power producers.

U.S. natural gas prices tumbled to their lowest in a decade during the second quarter as output from vast new shale rock fields overwhelmed demand.

For big buyers of gas, such as power producer Calpine Corp and chemicals maker LyondellBasell Industries NV , the drop below $2 per million British thermal units was a boon to profits.

LyondellBasell said its cost to produce ethylene, a key chemical used to make plastics and many other consumer goods, fell 46 percent in the United States during the second quarter.

That helped the company top Wall Street estimates, even as the weak economy dented its revenues, and its shares rose more than 9 percent in afternoon trading.

For Calpine, whose fleet of power plants relies heavily on natural gas, the cheap fuel helped it win market share from coal-fired power plants.

"Natural gas generation is becoming the preferred generation of choice since it is cheaper, more efficient, more flexible and environmentally cleaner than coal," Calpine Chief Executive Jack Fusco told a conference call.

For decades, coal-fired power plants supplied about half the U.S. power market, but that has shrunk as vast new supplies of natural gas have come on line.

U.S. power production from natural gas matched the output from coal-fired plants for the first four months of 2012, with each of the fuels contributing 32 percent of the nation's power, according to data released earlier this month by the Department of Energy's Energy Information Administration.

Still, natural gas prices have already started to rise, largely because companies such as Exxon Mobil Corp, Chevron Corp and other producers have chopped spending on new wells.

"It's pure supply-demand economics," said Mike Kelly, an analyst with Global Hunter Securities in Houston. "The cure for low gas prices is low gas prices."

PAIN AT THE WELLHEAD

The cheap gas caused some acute pain for producers over the past few months.

Chevron, which boosted its U.S. natural gas presence with the $3.2 billion purchase of Atlas Energy last year, said its sales price for the fuel fell by 50 percent to $2.17 from a year ago.

Exxon Mobil, which jumped to the top among U.S. producers with its 2010 purchase XTO Energy, said its U.S. oil and gas earnings tumbled 53 percent, largely from the weakness in gas prices.

Exxon CEO Rex Tillerson has said the low prices in the second quarter did not cover production costs and told an audience in June that producers were "losing their shirts" in natural gas.

But the pain for the big producers is abating because natural gas prices have rebounded more than 20 percent since mid-June to about $3.04. NYMEX futures prices show the prices likely rising to $3.50 by the end of the year.

That rise cannot come soon enough for U.S. coal producers, whose shares have been hammered largely by the declining demand for electricity producing thermal coal.

So far this year, the Dow Jones U.S. Coal Index, which includes Alpha Natural Resources Inc, Peabody Energy Corp and Patriot Coal Corp, has plummeted 43 percent and hit a four-year low earlier this week.

Arch Coal Inc, which rallied 30 percent on Friday a fter dropping to a 12-year low on Thursday, posted a second quarter loss on Friday, largely due to costs associated with shutting down unprofitable mines.

But it still managed to beat the gloomy Wall Street forecasts and it held out hope the recent rise in natural gas prices would create an opening for its lower-priced Powder River Basin coal.

"We're not bringing on a lot of additional production at this point," CEO John Eaves told a conference call. "We're not going to do that until we see more sustained demand moving forward. And, hopefully, we'll see that in 2013, 2014."