Why These Oil Majors Are Betting Heavily on the U.S. Energy Boom

Oil majors are increasingly relying on domestic energy as their major source of oil production and development. What may have seemed impossible just a few years ago appears to be coming true: Several of the global supermajors are abandoning overseas projects and, instead, will divert assets back to the U.S. to take advantage of the boom in domestic energy.

Political instability and ongoing conflicts abroad have resulted in international operations becoming riskier with each passing day, making the relative safety of the U.S. that much more attractive. As a result, energy majors including ConocoPhillips (NYSE: COP  ) , Occidental Petroleum (NYSE: OXY  ) , and Hess Corporation (NYSE: HES  ) are waving goodbye to riskier geographies, and focusing their attention on oil development in the United States.

Billions of divestments in the pipeline
ConocoPhillips, in conjunction with its most recent quarterly results, announced it would sell considerable interests in Kazakhstan, Algeria, and Nigeria. Proceeds, which will amount to nearly $9 billion, will be reinvested in U.S. oil fields. Continuing political tensions and unrest prompted the move, as Conoco's underlying results were once again adversely affected by poor performance in the company's overseas projects. Conoco has lowered its output forecast for the remainder of the year due squarely to difficulties in its Libyan operations, which the company cites as "ongoing production disruptions."

Conoco's Kashagan project in Kazakhstan, a gigantic undertaking in the Caspian Sea, has amounted to the world's most expensive oil field. In addition, Conoco reached separate deals to unload its Algerian operations to a state-run oil firm in Indonesia.

ConocoPhillips isn't the only oil major seeing poor results from Libya, where renewed protests and labor strikes resulted in Libyan oil exports falling significantly in recent weeks. Hess held a similar sentiment when it released its own earnings results.

Falling Libyan production has meant oil majors needed to spend more, and that's exactly what brought down Hess's recent results. The company's full-year production is likely to disappoint, evident by Hess notifying investors that total production this year will probably come in at the lower end of its guidance. In all, total production fell in the most recent quarter to 310,000 barrels of oil equivalent per day, down from 402,000 barrels per day in the same quarter last year.

On the other hand, Hess is seeing strong results from its North Dakota operations, where production from its Bakken field increased 14% in the quarter, year over year. Results are so promising that Hess expects to open 170 additional wells at its Bakken operations this year, and has also lowered the average cost to complete a well there by 7%.

Meanwhile, Occidental Petroleum is in the beginning stages of divesting its own Middle Eastern and North African assets. The company recently announced it would sell its interests there, although exact financial terms are yet to be determined. These operations are fairly considerable, so the fetching price figures to be significant. Occidental's Middle East and North Africa assets contain 929 million barrels of oil equivalents in proved reserves, and generated $1.7 billion in after-foreign tax cash flow through the first six months of 2013.

President and CEO Stephen I. Chazen stated: "Our goal is to become a somewhat smaller company with more manageable exposure to political risk." Clearly, Occidental is echoing the concerns of other energy companies when it comes to international operations.

For these oil majors, there's no place like home
ConocoPhillips, Occidental, and Hess deserve credit for acknowledging a problem and finding suitable solutions. Their underlying results have been for some time, and continue to be, harmed by ongoing unrest abroad. Particularly in the Middle East and North Africa, production is being affected to such a significant degree that business in those regions is simply no longer as economically fruitful as comparable oil fields are in the United States. Whether betting on the U.S. will pay off remains to be seen, but it's nonetheless an important development that investors should keep in mind going forward.

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12/19/2014 4:02 PM
COP $70.98 Up +1.23 +1.76%
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OXY $81.52 Up +2.35 +2.97%
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