Shale Oil vs. Big Oil

Brian Hicks

Written By Brian Hicks

Posted August 6, 2013

If you think Big Oil is the safest investment bet, think again.

Oil giants like Exxon Mobil (NYSE: XOM) and Shell (NYSE: RDS-A) may have clout and standing internationally, but their production numbers have been falling behind.

fracking rigSmaller oil companies with a specialized focus on shale oil development are the ones attaining the most profits and production volumes.

Big Oil is currently the aging father of the oil industry, while shale oil is the hip son casting disdain on his father’s old ways. Simply put, Big Oil companies like Shell and Exxon have failed to stay ahead of the curve when it comes to shale oil production.

Shale, Shale and More Shale

Shale is the place to be for your energy investments, and it has been crucial in launching smaller oil companies like EOG Resources (NYSE: EOG) into big-boy territory.

The stock market has been rallying around domestic shale development because smaller companies have been at the leading edge of increasing production numbers.

These companies have been able to increase market value much faster than giant oil companies, and all of these small fish have been devoted to yielding higher output from shale oil wells. EOG was able to triple its profits in 2013 to $1.92 billion.

Pioneer Natural Resources (NYSE: PXD), another shale producer, was able to rise on the market by 64 percent so far this year. EOG, meanwhile, grew 24 percent.

But Exxon has only gained 3.3 percent this year, and Shell actually fell by 6.9 percent.

Exxon expanded its shale portfolio by $52 billion in the past few years, but most of those funds have gone toward natural gas, a fatal blow when considering that the price of natural gas has dropped below four dollars.

Shell has been purchasing shale assets, but the Anglo-Dutch company has been late in the game. Shell also hasn’t had the best of luck in striking oil in shale-rich areas. Shell’s shale assets have been worth $2.2 billion less than anticipated, and like Exxon, Shell also made the mistake of focusing on shale natural gas assets, Bloomberg reports. Only recently has Shell shifted to crude production.

Exxon has been especially hit hard by lagging demand in Europe, and refining capacity has been lackluster.

And refineries now need to purchase ethanol credits to comply with EPA standards. These credits have risen from pennies on the dollar to $1.40 in 2013, biting into refiner profits and causing a spike in consumer gasoline prices.

But smaller companies have placed less emphasis on refining and maintained focus on domestic shale in the United States. Exxon and Shell’s international pursuits have been vulnerable to economic and political pressures abroad. By contrast, Pioneer got rid of its oil assets in the Gulf of Mexico and Africa to focus on domestic shale, therefore increasing overall production by 17 percent, according to Bloomberg.

Shale Rich Hotspots

There are key areas in the U.S. and Canada where smaller companies have been successful.

The shale oil boom has taken North America by storm, starting with Canadian production, which mostly involves tar sands production in the Alberta region.

If Keystone XL is approved, it will provide a much-needed pathway connecting Canadian and U.S. production and refining. And it will help speed up Bakken production in the process.

Primary states for the shale oil boom are Texas and North Dakota. The Mancos shale, in Colorado and surrounding states, is another piece of prime shale territory to keep an eye on.

And watch out for the Mississippi Lime territory, as many refiners prefer its sweet domestic variety to the same type imported from Africa.

In North Dakota, oil production from the shale boom is approaching 800,000 bpd, and Bakken crude is becoming a prime commodity for refiners outfitted for light crude. Keep an eye out for the Three Forks formation alongside the Bakken; there are plenty of undiscovered shale deposits there that can be exploited.

EOG Resources is currently the largest holder of drilling rights in the Eagle Ford shale of South Texas. Conoco Phillips (NYSE: COP) was able to double its oil output to 121,000 bpd in the second quarter. With the Permian Basin of East Texas, the Bakken shale of North Dakota, and the Eagle Ford, production for COP rose 47 percent.

The Barnett shale has been primary territory for shale crude, and you also want to follow the Permian Basin, where energy job growth has skyrocketed to the point of housing shortages.

If you’re looking to get the most out of your shale investments, keep a focus on companies specifically targeting crude.

The shale oil and tech economies share a similar trend; lately, there has been more growth and excitement in smaller companies looking to make a good impression with investors and shareholders.

For now, at least, natural gas production in shale territory is a loser financially.

If you want to get the most out of your energy stocks, keep following the smaller fish and wait to see if the big fish will eventually catch up to shale energy trends.

Big Oil may be the aging parent looking to be hip by joining the shale bandwagon, but there is still time for these oil giants to play catch-up.


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