Deborah Rogers tackles the inaccuracies printed by the Wall Street Journal on the so-called benefits of shale gas. South Africa better do the math.
By Deborah Lawrence Rogers
A recent opinion piece in the Wall Street Journal touted the financial benefits “to the poor” from fracking for natural gas. The piece based its entire premise on the ridiculous assumption that natural gas prices will stay low indefinitely. Such logic is seriously flawed. But for one of the world’s most prominent business papers to propound such an assumption is tragic.
Natural gas prices have indeed declined 61% from their highs which has translated into near term cost savings for manufacturing and electricity generation. No one would dispute that fact. But to infer that such a decline was intentionally designed by industry to continue long into the future requires a leap far beyond credibility. These same purportedly “altruistic” companies are struggling with massive impairment charges, negative free cash flow, fire sales of assets and ever weakening balance sheets, some even tottering on the brink of bankruptcy, because of the decline in natural gas prices. It is far beyond the realm of credibility to infer that such a decline was intended and even wished for by industry in order to “help the poor”. This borders on delusional.
The opinion states:
“…fracking is a much more effective antipoverty program than is Liheap.”
That statement can only be argued true from one angle: prices declined precipitously which in turn benefited consumer costs in the short run. This price decline, however, was the direct result of oil and gas operators over-producing natural gas on such a massive scale that they significantly disrupted the market and tanked prices. Further, and equally, one could reasonably argue that such disruption was irresponsible and poor management of natural resources. Leaving that aside, however, there have been not one but two rounds of massive impairment charges that have occurred in shale companies since 2009. The latest round began about a year ago with billions in write downs and culminated in the last quarter with corporations the size of Exxon Mobil and Royal Dutch Shell announcing intended shale asset sales as they reeled from a considerable drop in earnings.
Moreover, free cash flow in shale companies has been consistently deteriorating since 2008 with greater and greater losses incurred each passing quarter. Taking a universe of only five shale companies with onshore operations – Continental, Range, Devon, Kodiak and Chesapeake – one finds that free cash flow is alarmingly negative in every case. Further, CAPEX exploded during the same time in spite of the fact that no free cash was generated.
According to the WSJ opinion:
“Thanks to the lower price for natural gas, families saved roughly $32.5 billion in 2012.”
No one would argue that a cost savings of $32.5 billion to consumers is a bad thing but it must be juxtaposed against the fact that these 5 companies alone spent approximately $56 billion in capital expenditure since 2010, well in excess of the $32.5 billion in consumer savings. Nevertheless the free cash generated from their $56 billion spending spree is non-existent and losses are mounting. That equates to significant shareholder destruction and is not sustainable in the least. In order to keep producing natural gas, companies must begin to generate profits from shales and the only way that will happen is if prices increase in which case all “benefits to the poor” will evaporate like proverbial hot air.
It is more than strange, therefore, to witness cognitive dissonance at one of the premier business journals as the authors apparently dismiss the possibility of companies spinning headlong toward bankruptcy or destruction of shareholder worth as long as they provide economic benefits…to the poor?!!! Perhaps this should be our clue that something is truly amiss.
After all, entities such as the WSJ used to promote companies engaging in business to make money. Philanthropy belonged to another realm. Surely, they are not seriously advocating a paradigm shift.