Numbers show Big Oil trying to right ship

It’s not that the resource is scarce, rather that the plays are more complex

For anyone who thinks it’s easy to make a buck in the oilpatch, a look at the quarterly results released to date — especially by the big players in the sector — tells the story of the challenges faced by the sector.

On the face of it, the numbers are eye-popping. Add up the quarterly profits of BP, Chevron, ConocoPhillips, ExxonMobil and Shell and you get to $19 billion US.

It’s not pocket change, but the results released by each company — except ConocoPhillips — showed fourth quarter net incomes dropped by almost 30 per cent; in the case of Shell, it was a whopping 48 per cent. And the reasons given were almost uniform: Rising costs, falling production and refining margins being whacked.

Given the billions of dollars that were plowed into exploration and development in 2013 that did not translate into higher production rates, the results are depressing; Exxon spent $42.5 billion in 2013 only to see its production fall by almost two per cent. But the signs of this were arguably on the wall in 2011, when the industry spent $550 billion but didn’t manage to replace production.

What this speaks to is the ongoing challenge of finding the next barrel in a world where the easy barrels of oil and cubic feet of natural gas have been found. It’s not that the resource is scarce, rather that the plays are more complex — in unconventional formations — and therefore expensive.

The challenge is continuing to spend the dollars on unconventional projects, the cost of which are compounded by rising costs and profitability compromised because of a commodity price environment that many see as static.

The decision matrix is different for Big Oil compared with the national oil companies it competes with for access to resources. Whereas one is beholden to creating value for shareholders, the other is following a different agenda.

Some say Big Oil is suffering from not having jumped headlong into the shale revolution, whether oil or natural gas, leaving the independents to buy up the land in those plays and claim that space. A study released last month by the consultancy firm, IHS, might lend some credence to that view. The report showed

Pioneer, EOG and Continental posted the biggest jumps in terms of market capitalization between 2012 and 2013, which means the market continues to be interested in North American-based, liquids-rich plays.

But it also showed big players that made North America an investment priority (such as ConocoPhillips) were rewarded.

What was most interesting, however, was a graphic plotting the share price performance of the entire sector in 2013 — including both the international oil companies and the national oil companies. In that graphic, the IOCs clearly outstripped the NOCs in terms of market valuations.

The numbers showed the total value of the IOCs rose by nine per cent while that of the top NOCs fell by 15 per cent.

According to IHS, the reason is fairly straightforward, despite the fact the NOCs have greater access to reserves around the world.

“Investors became increasingly concerned that these companies’ privileged access to resources is often tied to expectations that they will build value not only for shareholders but for the parent state and key sectors of the host economy.”

Thus, despite access to reserves, the market remains uneasy about the NOCs.

One might say it puts the IOCs in the safe haven category of energy investing.

And in today’s world where it is easier to add production through an

The challenge in all this remains the path the IOCs choose to take in terms of adding shareholder

value

acquisition, the prospect of being able to use shares with stronger relative valuations as currency has to be seen as good news.

The challenge in all this remains the path the IOCs choose to take in terms of adding shareholder value.

It’s tough to find a good example where a company succeeded in “shrinking its way to prosperity” and yet divestiture programs have been announced by many of the major players.

Shell is selling $15 billion in assets and some have suggested that number could go as high as $30 billion, as non-strategic assets such as its 23 per cent interest in Australia’s Woodside Petroleum are re-evaluated, BP announced late last year that it was going to sell another $10 billion in assets, after having sold $38 billion in assets since 2010.

The question is whether the after-tax proceeds from such programs are directed toward capital expenditure programs or acquisitions — which come with greater uncertainty — or the buy back of shares, which is not risky and creates value through financial engineering but does nothing in terms of long-term growth.

The IHS report showed the market is not penalizing the big players, at least not yet. And there is no question the current environment — as the numbers show — is not an easy one. Still, spending billions to see production fall can’t go on indefinitely, either.

This landscape will create a crisis for some and opportunity for others; expect some tough decisions in the coming months.