New Year's Day can't come too soon for most energy producers. After the 2007 and 2008 booms, 2009 was a bit of a letdown. Revenues and profits were down, though improving in the second half of the year. So what about next year?
Professional services firm BDO Seidman, LLP surveyed CFOs at oil and gas E&P companies to get a read on what to expect for 2010. According to Seidman's press release, 40% of CFOs don't expect access to credit to improve until the second half of next year, and more than 30% believe credit access won't improve until 2011 or 2012.
The main impact of that finding will be on capital spending. Big oil companies like Exxon Mobil (XOM),ConocoPhillips (COP) and Chevron (CVX) have all announced either reduced or flat capital spending for 2010. Smaller producers will also cut spending in an effort to preserve cash and improve free cash flow numbers.
Constrained capital spending affects more than just producers, of course. Oilfield service companies likeSchlumberger (SLB), Halliburton (HAL) and Baker Hughes (BHI) also face potential declines. For domestic U.S. production, lower capex affects local and state economies by eliminating jobs and lowering tax revenues.
Producers are also worried about legislative changes and complained that few federal stimulus dollars benefitted the energy industry. The primary legislative change would be adoption of some method of pricing carbon. Exxon CEO and Chairman Rex Tillerson probably spoke for many producer executives when he came out in favor of a carbon tax as opposed to a market-based cap-and-trade system.
Certainly a defined tax rate for carbon is less volatile than a market-based system, but it is unlikely that the U.S. Congress could gather up the courage it would require to establish such a tax.
If any legislative changes are forthcoming for energy producers in 2010, they won't find out what they are until the second half of the year given all the other things Congress has to fight about. And unless unemployment numbers begin to fall, demand for gasoline will not improve, further moderating prices for both crude oil and gasoline. If that happens, access to credit could remain difficult, keeping pressure on capital spending.
The CFOs in the Seidman survey have it about right on prospects for 2010. It's not a pretty picture.
December 3, 2009
By Paul Ausick, Contributing Editor, InvestorPlace
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