Why Independent Producers Are Vastly Outpacing Big Oil

Energy investors have effectively reached an earnings season tipping point, with the majors having told us about their fourth-quarter and full-year results and most of the independents still preparing to do so. While I obviously can't predict with absolute certainty the impending announcements from the likes of EOG Resources (NYSE: EOG  ) and Whiting Petroleum (NYSE: WLL  ) , they're likely to outstrip those that we've already received from ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , and Royal Dutch Shell (NYSE: RDS-B  ) .

As for the weaknesses displayed by the majors during both the past quarter and the entirety of 2013, it may very well be that increasing complexity -- both geographic and operational -- is hindering the growth of the big, integrated companies. That essentially was the message from Shell at earnings release time. Indeed, the company's new CEO, Ben van Beurden, was quoted by The Wall Street Journal as saying that Shell's big, expensive projects have caused it to become "convoluted," making it difficult to "set targets for production or cash flow."

Worse than stagnation
While Shell's results included a 71% year-over-year plunge in its fourth-quarter profit, ExxonMobil and Chevron hardly set the world afire. Exxon's quarterly earnings slid by 16% (27% for the year), but the real attention should be directed toward its balance sheet. Despite -- or perhaps because of -- yet another year of declining production, the company's capital spending for 2013 reached $42.5 billion, up 7% from 2012.

Those funds sat atop another $25.9 billion expended for dividends and share buybacks. One significant result of these layouts was corporate debt of $22.7 billion, or almost twice the year-earlier figure.

Similarly, declines in both domestic and international production at Chevron were partially responsible for a 32% cut in year-over-year fourth-quarter profit. And, like Exxon, the California-based company boosted its capital spending to nearly $42 billion, from just above $34 billion in 2012.

Smaller outlays, better results
But while the majors are writing big checks for large projects around the world -- including ExxonMobil's somewhat questionable array of ventures with Russia's Rosneft in the Kara and Black seas, the Gulf of Mexico, the U.S. mainland, and Canada -- most of the independents are more closely tied to North American plays. For instance, while EOG Resources conducts some international operations, it has benefited most from its activities in the Eagle Ford, the Bakken, and the Permian Basin.

Nary a quarter passes for which EOG doesn't announce the application of altered well spacing or new production techniques that have led to output increases and cost reductions for its U.S. plays. One result is a nearly 34% improvement in its share price during the past year. That compares with slightly more than a 3% decline for Chevron, a less than 2% improvement for ExxonMobil, and an improvement at Shell of below 5%.

An improved approach to fracking
EOG's advancements have been popping up for some time now. Back in 2006, drilling in the Bakken, it used fracking to produce oil, debunking those who thought the technology was only effective for natural gas. And more recently, the company has tweaked its fracking techniques in the liquids-prone shale plays. Quite simply, the company's engineers have decreased the length of the fracks, while increasing their circumference.

By thus staying closer to the well bore, the company (once a part of Enron) has been able to generate a happy combination of higher initial production rates and reduced decline rates. The obvious result is a jump in the estimated ultimate recovery from the wells.

New tricks don't remain secret in the oil field for long, however. And so EOG's advanced approach is being employed successfully by Whiting, a smaller -- less than $7 billion market capitalization to EOG's $47 billion -- producer that is also active in the Bakken. Other places where Whiting is turning drill bits to the right include the Permian Basin, the Denver-Julesburg Basin, and the Gulf Coast.

Stick to the independents
There are several other independent producers that Fools would be wise to monitor as well. Most will reporting earnings soon. But you likely get my point: It appears best to eschew buy orders on the majors for a time, while turning your attention to the far more focused independents.

OPEC's worst nightmare
There are a number of companies deserving of attention by energy investors in 2014. Warren Buffett is so confident of one that he recently loaded up on 8.8 million of its shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click here to uncover the name of this industry-leading stock, and join Buffett in his quest for a veritable landslide of profits!


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2831000, ~/Articles/ArticleHandler.aspx, 12/18/2014 5:39:15 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement