It has not been a good time to be invested in major oil and gas companies. Across the majors, production, reserve replacement and earnings have disappointed. (A continuation of a trend discussed in this prior article). In a $100+ oil price environment, this is negative for the prospects of the oil majors stocks, bullish for the price of oil (NYSEARCA:USO) as the high price does not seem to even support stable production levels for these large producers, and very bullish for small growing oil companies that the majors may need to buy in the future to replace their reserves and production.
Exxon (NYSE:XOM) reported on January 30th. Production fell 1.5% year over year, missing even Exxon's own dismal guidance of a 1% production decline. Capex rose to $38.2 billion, a 4% increase. Obviously it is not a good trend to see rising capex coinciding with declining production. And Exxon continued buying back stock, deploying $3 billion in the 4th quarter, a small fraction of its capex budget and perhaps not enough to compensate for production declines. Investment bank research is indicating that Exxon may lower its forward growth guidance, which could further pressure the stock. Despite the halo affect of Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) buying stock, Exxon may struggle due to its fundamental reserve and production growth challenges.
Chevron (NYSE:CVX) reported on January 31st. Production declined 3% year over year, and while its upstream business earnings declined by 11% year over year, refining earnings severely disappointed, coming it at just over half of expectations. Importantly, Chevron's net debt position increased by $5 billion quarter over quarter, overwhelming the $1.25 billion of stock bought back in the 4th quarter and implying the buyback is unsustainable. Chevron guided to growth of 0.5% for 2014, much lower than analyst consensus of 4% growth for 2014. And to top it off, Chevron only replaced 85% of its produced reserves in 2013. Not a good quarter or year for Chevron.
Conoco (NYSE:COP) also reported on January 30th. Unlike Exxon and Chevron, Conoco has spun off its refining business and focused on upstream, so investors likely expect more growth, particularly in a high oil price environment. Production from continuing operations in 2013 fell by 6%. And Conoco came in with anemic 3% reserve growth year over year and 3% forecast production growth for 2014, which could be the first year Conoco grows since 2009.
Shell (NYSE:RDS.A) forecast earnings on January 17th. Shell's reserves and production have disappointed. And importantly, Shell took billions of dollars of asset write-downs in 2013, on the back of disappointing exploration and delineation programs in such areas as the Eagle Ford and the Mississippi Lime. Meanwhile, analysts have been cutting forecast earnings for Shell for 2014 and 2015 as the future looks to them to bring more disappointments. Keep in mind, this is in a $100+ Brent oil price environment, a time when many investors and analysts might have expected oil majors such as Shell to thrive.
These are difficult times for oil majors. At $100+ international oil prices, it seems reasonable to expect large oil companies to outperform. As these companies struggle despite a high price environment, there will be increasing pressure on them to grow or to return capital to shareholders. One of the more economic ways for them to grow could be to buy highly economic, growing oil assets from junior producers, as reserves and production are available at a fraction of the valuations the majors trade at, and there are massive cost of capital arbitrage opportunities for majors trading at very low single digit free cash flow yields. I published a Seeking Alpha "top idea" about one such undervalued, high growth oil junior, which I explained in simple language here. In short, oil majors may continue to struggle, oil prices may be supported by those struggles, and rapidly growing, undervalued junior oil producers may benefit.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.