Oil Industry: Farewell, Good Old Days

by: Andrew Snyder

I sure hope those mega-profits the oil industry reaped over the past few years were well saved, because the glory days are over. Not only is a major economic slowdown destroying demand for oil and natural gas, but the absolute lack of available credit is putting the crimps on any remaining plans to explore and develop new territory.

In my home state of Pennsylvania, natural gas companies as recently as this summer were going door to door trying to buy mineral rights from landowners. With energy prices in record territory, they were writing some huge checks. It is a similar situation across the country. Now that prices are down almost 50% from their highs, energy companies are starting to believe they made a huge mistake.

In case you have not noticed, crude prices have been plunging right along with the equities market this week. Earlier today the price of a barrel of oil dropped below $80 for the first time since September of 2007.

If the International Agency on Energy (IAE) is right with its demand estimates, more price cuts are on the way. The group announced today that it believes world oil demand will increase by just 0.5% over the next year. That would be its lowest growth rate since 1993.

Nearly every month for the past year, the IAE has cut its energy outlook. It is likely more cuts are on the way as this impending recession grips the world’s throat. Companies across the oil industry will be hurt.

Of course, the first company many investors think of when they hear about the oil industry is Exxon Mobil (NYSE:XOM). Sure, its days of $12 billion annual profits are gone for a while. But it will remain in business.

Hundreds of other not-so-well-capitalized businesses will be wiped clean. Not only is demand for their product tapering off, but they cannot get the credit they need to expand and find cheaper energy reserves.

Energy-sector companies like Chesapeake Energy (NYSE:CHK) that have fallen by more than 80% since July may look like fantastic bargains at this level, but do your homework before you leap into this mess of an industry.

Chesapeake is deadly low on cash and its bills are stacking up. Its reserves which it was counting on for big payoffs are now worth more than 40% less. Cash flow is going to be hard to come by.

It is the same tune all across the sector. In a recessionary environment, you have to be very careful about investing in the energy industry. There are some fantastic values out there thanks to high levels of panic, but you have to do your homework and pay attention.

Disclosure: none