Are Big Oil's Growth Days Numbered?

The media often portrays big oil companies as rolling in riches -- often at the expense of consumers. This article points out two risks to big oil that could mean their days of growth and market beating performance are coming to an end.

Aug 9, 2014 at 11:23AM

The media often depicts big oil companies such as ExxonMobil in a highly negative light -- awash in profits taken from consumers who suffer under the thrall of high gas prices. That's understandable given that 19 of the 25 highest annual profits ever recorded came from big oil companies; seven of those from Exxon, whose 2008 $45 billion annual profit is the largest in world history. 

Furthermore, the media likes to quote the astronomical sales figures generated by these companies' scale. For example, ExxonMobil is the fourth largest oil company in the world, just behind the Saudi, Russian, and Iranian national oil companies. 

This generates impressive sales figures as high as $500 billion in a single year.

XOM Total Expenses (TTM) Chart
XOM Total Expenses (TTM) data by YCharts

However, note Exxon's sky-high expenses and that its profit margin is actually just 7.7%. In fact, the average profit margin for the oil industry is just 5.2%,lower than other industries such as telecommunications (at 7.7%), banking (13.7%), or tech (17.1%).

The truth is that big oil companies are struggling to achieve growth in an age of climate change concerns, stricter environmental regulations, and exponentially rising costs. In this article I'd like to highlight two major growth challenges to big oil and why the industry's days of market-beating growth may be numbered. 

Production growth slowing in an age of diminishing returns
The world may be awash in oil, with as much as 7 trillion to 10 trillion barrels left in the ground in the form of conventional deposits, tar sands, shale oil, and kerogen; however, the cost of getting those resources out of the ground is climbing fast. 

Resized Ep

Source: Schlumberger 2014 Howard Weil Presentation

In the last 11 years, oil and gas exploration and production budgets have grown by 15% annually, a total of 400%, to $650 billion per year. Yet, over the last decade oil production is up only 15%.

One might think that shale oil, the cause of America's record energy boom, might be a solution to big oil's production growth woes, yet shale oil is only 5%-10% recoverable using standard technology. In fact, since 2004 the returns on investment for oil companies drilling for shale have declined by from 25%-30% to 10%-15%, owing to higher cost and first-year decline rates as high as 90%. 

Offshore drilling is another potential growth area, with ultra-deepwater (UDW) oil production expected to grow 19 times faster than conventional onshore production through 2030. 

Ultra Deep Water Fastest Growing Production
Source: Seadrill 42nd Howard Weil Energy Conference Presentation

Once again the problem here is cost. To safely drill 40,000 feet under the ocean, in up to 12,000 feet of water, requires the latest technology. Seventh generation UDW drill ships cost around $638 million to construct and as much as $653,000/day to charter. In fact, ExxonMobil is set to pay offshore driller Seadrill $950 million over the next four years for the use of just one UDW drill ship.

There's also the fact that not all big oil projects work out. BP's Muckluck well, drilled into the North slope of Alaska, was a dry hole that cost over $1 billion to drill ($2.47 billion in today's money). 

Law of large numbers catching up with big oil
A second major problem for big oil is its immense scale makes it hard for new projects to move the needle, in terms of production growth. For example, ExxonMobil is planning on spending $193.3 billion between 2013 and 2017 in capital expenditures to maintain production as well as on 24 new projects. 

Yet despite that herculean effort, Exxon is forecasting flat 2014 production and just 4% annual growth in oil output between 2015 and 2017 (1% increase in gas).

Even when a project can be found to move the needle, costs can often soar out of control. For example, Chevron's Gorgon LNG (liquified natural gas) export project was supposed to cost $37 billion. That estimate has risen 46% to $54 billion and the project won't be complete until 2015. 

According to Dr. Evans Gyasi, a researcher from the University of Warwick (UK), 80% of global oil and gas projects result in cost overruns -- by an average of 40%. 

Big oil companies such ExxonMobil, Chevron, BP, and Royal Dutch Shell have nearly all trailed the market in the last five years. 

XOM Total Return Price Chart
XOM Total Return Price data by YCharts

To help grow profits big oil is attempting to better control costs and invest smaller resources more efficiently. For example, Chevron has a plan to grow production by 20% over the next four years while keeping its capital expenditures constant. Similarly, Exxon's growth plans, mentioned earlier, actually represent a 13% decrease in annual spending for the company.

Another option for growing earnings per share is stock buybacks, which these four companies have been doing aggressively, to the tune of $27.4 billion over the last year alone. 

Foolish takeaway 
Big oil may have the biggest absolute profits in the world but in terms of profit margins and growth it's a brutal industry to be in. Slowing production growth and soaring costs are just two risk factors that threaten to bring the days of market-beating growth to an end unless cost control measures and stock buybacks can restore growth in earnings per share. 

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Adam Galas has no position in any stocks mentioned. The Motley Fool recommends Chevron, Google (C shares), and Seadrill. The Motley Fool owns shares of Google (C shares) and Seadrill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers