Last week, the three major oil companies, Exxon Mobil ($XOM), Royal Dutch Shell ($RDS.A), and Chevron ($CVX) all turned in fairly dismal earnings reports.
While the underwhelming performance on the part of oil majors throughout the second quarter has been attributed to lower per-barrel prices accompanied by production shortfalls, the trend has been present throughout the year and is expected to continue, as the biggest firms have vastly underperformed compared to independent oil and gas companies such as Pioneer Natural Resources ($PXD), Noble Energy (NBL) , and Cabot Oil & Gas (COG) .
The big three cited various reasons for anemic earnings; losses stemming from violent unrest in Nigeria (in the case of Shell), lower crude prices throughout the quarter, and unexpected maintenance costs resulting from refinery problems were all evoked by means of explanation. But the concurrent success of independent drillers suggests that there are perhaps more worrisome reasons for the recent results, at least from the perspective of the major integrated companies.
The reason for this is in large part due to the fact that independent oil and gas companies have done a far better job of positioning themselves to capitalize on the much heralded North American shale boom. The recent shrinking of the WTI-Brent crude spread reflects this. On July 18, the price differential between the two most important benchmarks shrunk to less than a dollar for the first time in over two years, and has remained fairly tight ever since, despite the fact that as recently as February Brent crude was trading at a premium of $23 per-barrel over WTI.
This is, however, is not to suggest that big oil has neglected US shale formations. Indeed, Exxon has dropped over $52 billion over the past three years in shale energy, but most of the returns have come from far less profitable gas than oil. Meanwhile companies such as Pioneer Natural Resources have shed off-shore assets in the Gulf of Mexico and globally in order to focus on American shale oil and gas.
Comparing the year-to-date performance of major oil with that of independent oil reinforces the picture to some extent. Exxon is up almost 8 percent, Chevron is up nearly 18 percent, and Shell is down nearly 5 percent. BP plc (BP) and Total SA (TOT) are up 3 and 7 percent respectively.
On the other hand, Occidental Petroleum (OXY) is up 18 percent, EOG Resources (EOG) is up 27 percent, Marathon Oil (MRO) is up 24 percent, Noble Energy has gained nearly 29 percent, and Pioneer is up a whopping 70 percent.
Shale oil is certainly not the only reason for the discrepancy. Major integrated oil companies handle every aspect of the process, from exploration to the gas pump, and that incurs costs to which the independents are not typically exposed. This past April, Valero Energy (VLO) , while not quite as enormous as some of the bigger firms, announced that it was spinning-off its retail business, CST Brands (CST) , now the world’s 9th largest specialty retail chain with a market cap of $2.47 billion.
Furthermore, the larger companies are more exposed to social and political unrest in various parts of the globe, as has been seen recently in Libya, where “revolution”-era Islamist militias (armed by Western nations) are threatening to upset the effort to replace the late Ghaddafi regime with a more pliable client, and in Nigeria, where Islamist fighters are wreaking havoc against the country’s Christian community, but have also mounted operations directly against international oil concerns.
Finally, with more shale discoveries as well as upward revisions of reserves in discoveries that have already been made in North America, there is nothing to say that big oil cannot substantially increase its involvement in the shale boom; it’s just that, smaller and more nimble companies have been able to get there quicker.
[Image: Satellite Photograph of North Dakota's Bakken Shale Formation, courtesy of Flickr Creative Commons]