The New Oil Majors

It takes time to build an empire. Both ExxonMobil and Chevron, the U.S. super-majors of today, trace their history back to the ultimate corporate empire: John D. Rockefeller's Standard Oil,  - which was founded more than a century ago.

Unlike asset-light technology companies that can grow quickly, the oil industry is notoriously capital intensive. Because they require so much capital, oil companies generally grow at a slower rate. Most of the large oil fields that can turn wildcatters into giant oil companies overnight have also already been found. So how is it that a new generation of U.S. oil and gas companies are increasingly coming into their own?

The benefit of being nimble
$100 billion is about the cumulative market cap of Pioneer Natural Resources  (NYSE: PXD  ) , EOG Resources  (NYSE: EOG  ) , and Continental Resources  (NYSE: CLR  ) . $100 billion is also roughly half of what ExxonMobil spent on share buybacks over the past 10 years. 

While conventional wisdom is that big players are more efficient because they have economies of scale and lower costs of capital, it turns out that there are benefits to being small as well. What may seem like a small opportunity can become a large one given the right technological advances and a hospitable regulatory environment.

That is just what happened half a decade ago. It was uncertain how promising shale plays were, and because they had long timelines and needed big projects to move the needle, the super-majors didn't take advantage of the opportunity as aggressively as the smaller players. As luck would have it, those small projects turned out to be huge and turned small companies into the next generation of oil majors.

The shale producers' growth rates are astounding. EOG is growing revenues around 32% year over year. Continental Resources, the largest leaseholder in the Bakken, is growing revenue at an astounding 60% clip year over year . The company's proved reserves increased 38% year over year to 1.08 billion barrels of oil equivalent.  

Pioneer Natural Resources, which is growing revenue around 25% year over year, might be the most promising company of the group. The company is one of the leading leaseholders in what it estimates to be the second largest oil field in the world, the Spraberry Wolfcamp field. The field has yet to be fully developed and may contain as much as 50 billion barrels of recoverable oil.  

The bottom line
There's still room for improvement. With pad drilling and other technological advances, the cost of oil production is still trending lower. And there are risks too, of course. Chief among the risks is increased government regulation; fracking is already banned in New York, andhas a chance of being banned in California. 

Some investors are still not convinced of the new oil majors, often using the argument that unconventional wells have faster depletion rates, making the production numbers misleading. While that is true, given the size of the total opportunity, shale oil production will more than likely continue to trend higher for the foreseeable future. Of all the projectionists, Continental Resources CEO Harold Hamm may be the most optimistic. He believes that Bakken shale will eventually produce 2 million barrels/day, about twice what the play is producing now.  

After all, every empire begins with great ambition.


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