Big oil released their Q2 earnings last week, and one of the developments that everyone is talking about is how the so-called "oil super-majors" [such as Exxon (XOM), British Petrolium (BP), and Royal Dutch Shell (RDS.A)] were outperformed by their domestic counterparts in natural gas. This comes even as rising energy demand in developing countries is out of reach for smaller firms, and a glut in the shale market caused a price-drop for natural gas overal. Oil speculators at The Economist and Fortune, among many others, are now saying that "smaller" energy firms are proving to be much more reliable investments than the big names.
Click on the images below to see ratings over time. Average analyst ratings sourced from Zacks Investment Research.
This seems surprising, as the rise of Chinese and Indian middle classes has the potential to drive global energy consumption higher than ever. That's certainly what big oil has forecasted – many of the firms projected that demand will rise from about 90 million barrells a day to about 104 million by 2030, nearly all of which is expected to occur in the developing world. However many analysts believe this forecast to be over-optimistic.
One would expect a commodity extractor to over-estimate rising demand for their product. This can help keep their share price high even as pulling oil out of the ground has gotten so much more expensive in recent years for a number of reasons. For one, nationally owned oil companies (NOCs, companies that are owned at least in part by the country where they are located) now own a majority of the world's oil reserves - 90%, up from 15% in the 1950s - and these NOCs aren't always easy for super-majors to do business with. The costs of extracting and refining oil have also risen considerably, giving oil stocks, which still rank among the most valuable listings in the world, a much larger overhead.
Even more disconcerting to investors, however, is that smaller companies and NOCs are now outspending their larger competitors in the areas of research and development – since 2005 NOC capital expenditures have grown twice as fast as that of their peers. This includes Brazil's Petrobras (PBR) and China's Sinopec (SNP) – potential bad news for companies like Shell who have wasted billions searching for oil, and extracting none, in places like Alaska and the North Pole (although as of this afternoon, its Arctic exploration is set to start again).
This of course contrasts starkly with a domestic environment that it highly conducive to growing profits. Continental Resources (CLR), a domestic natural gas company that extracts fuel from shale practically doubled their production in 2012, and some analysts are expecting it to double again by 2015 (from 43,000 barrells a day in 2012 to 187,000 in 2015).
Some analysts are also recommending a second look at companies that manufacture the technology used by oil companies instead of the oil companies themselves.
Halliburton's (HAL) stock is agreed by many to be undervalued – with a price to equity ratio that has fallen precipitously over the last two years. And smaller companies as well as nationally-owned oil producers in the developing world are expected to rely on these service providers more than the super-majors did. Halliburton's major competitor, Schlumberger (SLB), is also engaged in lucrative buy-backs from its investors – which could lead to greater returns for that company as well.
One exception to the sweeping pessimism seems to be British Petrolium (BP). The company was forced to sell off billions in assets to help cover legal costs in the wake of the Deep Horizon spill – which had a streamlining effect on a company and whose share price has since shown signs of recovering. Shareholders who still believe in the profitability of oil could also look to China, whose companies have made the most inroads in markets in Africa.
More and more people can afford to light and air condition their homes – and more and more people are buying cars and taking to the road. However, all of these processes have become more efficient. Even China has introduced relatively strong regulations for fossil fuel emmissions, and the oil-rich Middle East is exploring alternatives such as nuclear power. Everyone seems to be exploring oil-alternatives except for big oil; the household names in energy production are being out-paced. Investors should take note.
1. Exxon Mobil Corporation (XOM, Earnings, Analysts, Financials): Engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. Market cap at $410.78B, most recent closing price at $91.59.
2. BP plc (BP, Earnings, Analysts, Financials): Provides fuel for transportation, energy for heat and light, retail services, and petrochemicals products. Market cap at $133.01B, most recent closing price at $41.97.
Domestic Natural Gas Producers
4. Anadarko Petroleum Corporation (APC, Earnings, Analysts, Financials): Engages in the exploration and production of oil and gas properties primarily in the United States, the deepwater of the Gulf of Mexico, and Algeria. Market cap at $45.61B, most recent closing price at $90.85.
5. EOG Resources, Inc. (EOG, Earnings, Analysts, Financials): Engages in the exploration, development, production, and marketing of natural gas and crude oil primarily in the United States, Canada, the Republic of Trinidad, Tobago, the United Kingdom, and the People's Republic of China. Market cap at $41.53B, most recent closing price at $154.18.
6. Noble Energy, Inc. (NBL, Earnings, Analysts, Financials): Engages in the acquisition, exploration, development, production, and marketing of crude oil, natural gas, and natural gas liquids in the United States, West Africa, Eastern Mediterranean, the North Sea, and internationally. Market cap at $23.31B, most recent closing price at $64.92.
7. Continental Resources Inc. (CLR, Earnings, Analysts, Financials): Engages in the exploration and production of crude oil and natural gas primarily in the north, south, and east regions of the United States. Market cap at $17.94B, most recent closing price at $97.51.
Oil Technology Manufacturers
8. Halliburton Company (HAL, Earnings, Analysts, Financials): Provides various products and services to the energy industry for the exploration, development, and production of oil and natural gas worldwide. Market cap at $42.6B, most recent closing price at $46.05.
9. Schlumberger Limited (SLB, Earnings, Analysts, Financials): Supplies technology, integrated project management, and information solutions to the oil and gas exploration and production industries worldwide. Market cap at $110.B, most recent closing price at $82.89.
10. Weatherford International Ltd. (WFT, Earnings, Analysts, Financials): Provides equipment and services used in the drilling, evaluation, completion, production, and intervention of oil and natural gas wells to independent oil and natural gas producing companies worldwide. Market cap at $11.13B, most recent closing price at $14.46.
(List compiled by James Dennin. All data sourced from Finviz.)
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Dig Deeper: Access Company Snapshots, Charts, Filings
- Exxon Mobil Corporation(XOM, Chart, Download SEC Filings)
- BP plc(BP, Chart, Download SEC Filings)
- Royal Dutch Shell(RDS.A, Chart, Download SEC Filings)
- Anadarko Petroleum Corporation(APC, Chart, Download SEC Filings)
- EOG Resources, Inc.(EOG, Chart, Download SEC Filings)
- Noble Energy, Inc.(NBL, Chart, Download SEC Filings)
- Continental Resources Inc.(CLR, Chart, Download SEC Filings)
- Halliburton Company(HAL, Chart, Download SEC Filings)
- Schlumberger Limited(SLB, Chart, Download SEC Filings)
- Weatherford International Ltd.(WFT, Chart, Download SEC Filings)
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