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Energy Stocks

Big Oil: Size Matters

By Roger S. Conrad, on Nov. 12, 2014

When casual investors think of the energy stocks, one of the Seven Sisters—BP (NYSE: BP) NYSE: BP), Chevron Corp (NYSE: CVX), Eni (NYSE: E), Exxon Mobil Corp (NYSE: XOM), Royal Dutch Shell (NYSE: RDS B), Statoil (NYSE: STO) and Total (NYSE: TOT)—likely springs to mind.

But these Western energy giants have come in for a great deal of criticism over the past several years, as investors lose patience with the industry’s massive capital investments and limited production growth.

The Seven Sisters expanded their capital expenditures by 87 percent between 2005 and 2008, took a two-year breather after commodity prices collapsed in early 2009, and grew their expenditures by another 27 percent from 2011 to 2013.

Needless to say, the payoff from these investments has underwhelmed. Over the past decade, the West’s major integrated oil companies grew their total capital expenditures at an average annual rate of 20 percent to effectively maintain their hydrocarbon output.

Our next set of graphs breaks out the spending and production histories for each of the seven major integrated oil companies.

(Click graph to enlarge.)IOC CAPEX

However, the only meaningful production growth that the Seven Sisters have delivered over the past decade came from large acquisitions: Statoil in 2007 merged with Norsk Hydro’s oil and gas division, and Exxon Mobil in June 2010 bought leading shale gas producer XTO Energy for $35 billion.

(Click graph to enlarge)
IOC Production

Also note that Exxon Mobil failed to leverage what many regard as one of the worst-timed acquisitions in recent history into sustained production growth.

Within two years of purchasing XTO Energy, surging production and the no-show winter of 2011-12 sent North American natural-gas prices plummeting below $2.00 per million British thermal units.

Although the price of this thermal fuel has recovered from ultra-depressed levels to depressed levels, Exxon Mobil has dramatically scaled back drilling activity in Louisiana’s Haynesville Shale and other acreage acquired in the deal.

To an extent, the Seven Sisters’ challenges reflect the curse of large numbers. By dint of their size, these energy giants must pursue high-impact exploration and development projects to replace reserves, offset the natural decline rate in their legacy production bases and deliver a modicum of output growth.

And these high-impact exploration and development projects carry a hefty price tag and take multiple years to complete. Check out this graph tracking the major integrated oil companies’ average annual finding and development costs, a metric that represent the expense associated with adding 1 barrel of oil equivalent to reserves.

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