Shale Explorers Outperforming International Oil Titans

Shale Explorers Outperforming International Oil Titans

Oil explorers focused on high-margin shale drilling from Texas to North Dakota are set to outperform Big Oil this year.

EOG Resources Inc. (EOG), Pioneer Natural Resources Co. (PXD) and Continental Resources Inc. are poised to reap bigger returns for investors than energy titans 15 times their market values as they devote almost all their drilling capital to higher-margin, domestic crude wells, said Gianna Bern, founder of Brookshire Advisory and Research Inc. in Chicago. Houston-based EOG is estimated to more than triple profit in 2013 to $1.92 billion.The domestic price rally “is bullish for U.S. shale development and benefits producers with a high U.S. production profile,” Bern, a former BP Plc (BP/) crude trader, said in a telephone interview. U.S. shale “is where the growth is.”

West Texas Intermediate, the benchmark crude for onshore U.S. oil, has risen 16 percent this year as new pipelines and rail links eroded a supply glut in the Great Plains. London-traded Brent, the basis for two-thirds of international prices, fell 1.9 percent, undermining major international producers and contributing to second-quarter earnings from Exxon Mobil Corp. (XOM) and Royal Dutch Shell Plc (RDSA) that disappointed investors last week.

Exxon and Shell already are lagging behind some of the dominant domestic shale explorers in delivering returns to investors. Pioneer has risen 70 percent this year, while Oklahoma City-based Continental has increased 33 percent. EOG, the biggest owner of drilling rights in the Eagle Ford Shale in southwest Texas, has risen 27 percent.

Lagging Returns

By comparison, Exxon has gained 6.2 percent this year, while Shell fell 0.9 percent.

While Shell and Exxon’s profits were also diminished by shrinking margins from refining crude into transportation fuels, shale will be the driver for performance in energy-company earnings reports scheduled this week. Unit Corp. (UNT), a Tulsa-based owner of drilling rights in the Bakken shale, is expected to post its highest second-quarter profit in two years this week, according to analysts’ estimates compiled by Bloomberg.

That compares to a 57 percent plunge disclosed by Exxon and a 20 percent decline by Shell last week.

Pioneer, which shed deepwater Gulf of Mexico and African discoveries in recent years to focus on U.S. onshore drilling, boosted production by 17 percent and posted the biggest second-quarter profit in company history last week. The stock surged 13 percent on Aug. 1, the most since November 2011, after the Irving, Texas-based producer reported a pair of drilling successes in Texas’s Wolfcamp formation.

Record Profit

Halcon Resources Corp., the oil and gas producer run by former Petrohawk Energy Chairman Floyd C. Wilson, posted record quarterly profit on Aug. 1 after a five-fold increase in output from wells, according to data compiled by Bloomberg.

EOG and Unit are scheduled to announce second-quarter results on Aug. 6. Continental follows the next day.

The world’s biggest energy producers, including Exxon and Shell, have had mixed results while playing catch-up to smaller U.S. explorers that helped pioneer shale exploration.

Shell, Europe’s largest energy producer by market value, wrote down the value of its U.S. shale assets last week for the second time in less than a year, while saying its liquids-rich properties in Texas’ Permian Basin are “developing very well.” Natural Gas, the worst-performing commodity of the past half-decade in U.S. markets, accounts for more than 80 percent of the output from The Hague-based company’s shale wells.

Exxon’s Investment

Exxon spent $52 billion in the past three years to create a shale portfolio, though most of it has involved gas that tumbled to a 10-year low in 2012 and commands less than one-fifth the price of oil, on an energy-equivalent basis. During a conference call with analysts last week, Exxon touted its progress in ramping up output 74 percent from a year earlier to 60,000 barrels a day in the Bakken formation that sprawls beneath North Dakota and Montana.

ConocoPhillips raised its full-year production estimate to as much as 1.53 million barrels a day after unexpectedly reporting an output gain on Aug. 1, citing growing supplies from shale. Apache Corp. Chairman and CEO Steven Farris told analysts during a conference call last week that the Houston-based company is reaping 30 percent rates of return on wells in the Wolfcamp Shale.

‘Weak Spot’

The so-called integrated model encompassing every facet of the oil industry from wells to retail filling stations is hurting the largest international companies, said Edmund Cowart, who helps manage $22 billion at Eagle Asset Management Inc. in St. Petersburg, Florida.

Refining was the “weak spot” in Exxon’s quarterly earnings with profit in the segment dropping 94 percent, Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, said in a telephone interview. He rates Exxon a hold.

Shell cited the shale writedowns and oil theft in Nigeria after it missed earnings estimates, prompting shares to fall the most in two years.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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