A warmer-than-expected winter and high levels of production have driven up natural gas supplies, and prices have suffered for it. Successful production from shale sources across the country is one reason supply is at unusually high levels. The growing supplies are hurting the independent oil and gas companies, especially those whose primary business is natural gas. Prices of natural gas have dropped roughly 15%, and the sharp decline is hurting producers. At the same time, natural gas prices are in decline and crude prices are inflated. Integrated oil and gas producers will not have as hard a time this year as the pure natural gas plays, since the rise in crude prices can offset some of the decline in natural gas.
Devon Energy (DVN) set an all-time revenue record last year, but only managed to increase earnings in 2011 by 2%. The gains were primarily made on expanded production, offset by lower prices. Devon's adjusted earnings in 2012 totaled $4.7 billion versus the previous years $4.6 billion. The outlook for 2012 may not be as rosy if Devon can not increase its production of crude and other liquid assets to offset the decline in natural gas prices. Devon is heavily invested in natural gas production, but is planning on increasing its footprint in the crude and natural gas liquids market. In its 2011 earnings release, the company noted that sales of crude and other liquids accounted for 60% of sales and contributed favorably to the increase in earnings.
The company recently released plans to increase its capital expenditures this year by over $1 billion. The money is going to be used to increase exploration and leasehold acquisitions in a play to expand crude oil production. Previously, the company had planned to spend $5.1-$5.5 billion in 2012 on improvements with only 10% allocated to oil and natural gas liquid exploration. Of the $1 billion, Devon is planning on investing $350 million in its Cline Shale play, $500 million for an undisclosed onshore target in the US, and the rest on other oil and gas liquid investments. Devon is estimating that it will grow production by 6%-8% over the next four years, with crude and liquid production growing by 16%-18%. Devon increased total liquids production by over 20% in the fourth quarter of 2011 alone and is on pace to continue.
Devon is also capitalizing on its current reserve pipeline. It recently received close to $2.2 billion from Sinopec International Petroleum Exploration in exchange for a one-third interest in five of its new venture plays in shale deposits across the western portion of the US.
New Field Exploration (NFX) is also planning a strategic shift away from natural gas. The company is expecting a natural decline in natural gas production of 15% and is not planning on to pursue replacement. The dramatic shift in prices is what sparked the change in focus. The company expects the transition to happen over the course of 2012 with oil estimated to be more than 50% of production in the second half of the year. Planned capital expenditures are less than the previous year but are intended to help increase the expected yield of crude and liquid production by over 20%.
Supply and price are not the only things weighing on ATP Oil & Gas (ATPG). The company has rising debt and diminishing cash flow. Its bonds are among the highest yielding junk bonds on the market and the company is planning to issue more debt based on future production from its Gomez and Clipper projects in the Gulf of Mexico. Some of the proceeds from ATP's debt offering will go to Subsea 7, a Norwegian oilfield engineering firm who was recently awarded a $175 million contract for services in the Cheviot Field, off the coast of Shetland.
The company's bonds are near default. Moody's rates the company at Caa2 with a negative outlook. Moody's is expecting ATP to have to restructure because the current cash flow does not meet the needs of future debt payment requirements. ATP currently has a bond coupon payment due in November totaling around $90 million.
ATP has been cushioned from the drop in natural gas by its investment in oil production. The rise in prices has been helping with revenue and allowing the company to issue debt on future projects at higher rates. The threat from Iran, which has driven oil prices up this year, has been helping ATP. The companies average selling price per barrel of oil rose by 35% this year. Earnings this year beat expectations and the company is expected to increase oil production by over 31% in the coming year. Analysts are expecting ATP's total oil production to total over 70% for 2012 and should positively impact the bottom line.
Occidental Petroleum (OXY) is producing roughly the same amount of total production as Devon and has the added benefit of chemical production and sales. Its jump in sales last year was based on increased production levels and higher prices for crude oil. The company's daily production reached record levels in the fourth quarter of 2011, and helped the company reach a yearly increase of 4%. Occidental increased oil and natural gas production in 2011 with natural gas outpacing oil. This is a trend the company will have to address moving forward.
All four stocks have been wallowing over the last year as natural gas prices have fallen. Devon energy is ahead of the curve as far as shifting its production toward crude and liquids plays. ATP is also faced with cash flow problems and an expected restructuring. At the very least, it has to worry about the upcoming coupon payment on its previously issued debt. Occidental and Newfield will also gain over the next year, but I think Devon is the best positioned oil and gas producer to benefit from a shift in production. Newfield is behind the curve and Occidental does not appear concerned with shifting to oil production.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.