Tuesday, December 15, 2009

Shrink to Grow?

On Friday I read an article in the Wall Street Journal about the El Paso Corp. analyst presentation that summarized the company's business strategy as "shrink to grow."  El Paso will focus its resources on growing its domestic gas business at the expense of some of its other business lines and its own profitability.  The company will stick to its 2010 plan to spend $4.1 billion in capital, a figure that well outstrips its self-generated cash flow.  As a result, the company likely will have to sell assets to cover the shortfall.  That's a bit dicey to me.

This is not unlike the strategy of Devon Energy, which is selling its Gulf of Mexico and international operations to focus on domestic gas.  I like to see the increased strategic focus on domestic natural gas, but seeing so many companies follow this strategy, I'm starting to wonder if it is a "golden opportunity strategy" or an "our back is against the wall strategy." 

As I noted earlier today, El Paso believes our nation's energy future = natural gas.  Of course, if your business is all about natural gas, I hope that is your belief.  I happen to agree with this concept and think it is more than just salesmanship.  But I'm starting to get this creeping feeling that the big natural gas independents are finding themselves skating on thin ice.  They've spent billions tying up leases, exploring and drilling.  But the reward for their unprecedented success has been a natural gas supply glut that has killed commodity prices.  Some of that can be blamed on the recession and a temperate summer, but we saw NG storage hit 99% capacity with voluntary production curtailments in place.  Think of what would have happened if they produced with the spigot open?

The news yesterday that Exxon is buying XTO is something of a double edged sword.  It is validation that the shale gas phenomenon (at least from a supply perspective) is real.  But it might also be an indication that the big gas independents won't be able to go it alone.  Will they be able to survive another summer of $2.50 NG and curtailed production?  Not if they're outspending their cash flow.

In the past, I  have expressed concern about the future viability of the small NG independents, but now I wonder whose days are really numbered?

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