These days, some of the big oil stocks are behaving in somewhat unpredictable ways. This is the case for Royal Dutch Shell (RDS.A, RDS.B) and PetroChina Company (PTR), neither of which presents a very promising picture for investors, in my opinion, since this sort of unreliability can be hard to guage. Even Exxon Mobil (XOM) has not been immune from sudden leaps in value. In the midst of this instability, Colombia's Ecopetrol SA (EC) has remained untouched. Instead of jumping around like a flea, this stock has had a very steady climb for all of 2012 so far. Certainly, other smaller operators have had a positive 2012 thus far. The oil majors however, are undergoing consolidation. It looks to me like Exxon is in for hard days, unless it can solve the problems it has been accumulating for some years now.
Exxon has long been the subject of much criticism, especially from environmentalists. Even now, as the company tries to push forward the National Math and Science Campaign and other endeavors to promote learning in those areas, harsh responses continue to be forthcoming. It seems to me that this company has lost its credibility among those who wish to see some social and environmental responsibility emerge from the Exxon ranks, which bodes ill for the stock overall. If people do not view it favorably even when it appears to be behaving in ways of which they should approve, then I think there is a problem with its image that cannot be fixed by a simple PR campaign like its latest.
On the other side of the fence, some people are still happy with the company, maybe in part due to its apparent ability to keep finding new markets for itself. Exxon is exploring opportunities in North America, but also in Russia, in partnership with the Russian company Rosneft (ROSN). While this might appear to show Exxon's resourcefulness, I believe that the fact that it needs a teammate shows cracks in its armor. The company is taking on significant geopolitical risk with this partnership, specifically because Putin is back in charge. As a result, the country faces serious economic and political uncertainty. The Russian political body has nationalized oil and gas assets in the recent past. Exxon faces real risk in getting its fair part of the bargain.
The other mistake that Exxon is making, in my opinion, is its foray into natural gas. Other companies, including Sandridge (SD) and Cimarex (XEC) are moving away from gas and focusing on oil or natural gas liquids ("wet" gas) that fetch a higher price per barrel equivalent. CEO Rex Tillerson is putting a lot of emphasis on this resource, so much, in fact, that the company now produces equal amounts of oil and gas. To me, this seems like a risky balance, since hydraulic fracturing might have serious consequences for ground water and other vital resources, even causing manmade earthquakes. Not only are such contaminations dangerous for the future of human survival, it is also financially irresponsible, in my view, because the entire industry could shut down very abruptly if the government decides to protect its citizens from the potential loss of aquifers that could result from natural gas extraction in this form. While Exxon's XTO acquisition was a positive in 2009 and the company gained a significant technological advantage since XTO largely co-pioneered horizontal drilling techniques, the current $2 per mcfe range for nat gas has diluted that investment in the short run.
Royal Shell has similar issues with which it must deal. Its reputation has also been sullied in the past, and even the United States Bureau of Safety and Environmental Enforcement (BSEE) probably cannot absolve it of its sins in the eyes of consumers. What was thought to be an oil spill from rig operations in the Gulf of Mexico has turned out to be a natural leak according to the BSEE, and the sheen has dissipated. This is definitely good news all around, but I do not expect the public to easily forget that it could have been a spill. Unfortunately Royal Shell will still bear the brunt of the spill even though it was not likely at fault. In this way, oil companies always have to be careful managing both technical operations and public relations, but particularly so these days, since the Deepwater Horizon incident, which might never be entirely forgotten.
Indeed its shares are cheap. Royal Dutch is parting with its cash by buying back its own shares. The company could have many reasons for doing this, but judging by the erratic state of affairs with stock value, the company is likely getting a higher return on invested capital through the buyback in lieu of boosting its dividend or pursuing additional projects. To me, that means that the company might be running out of ideas of ways to maintain competitiveness, and the only way to use its cash hoard that it can think of is to buy back shares, so as to reduce their availability. Ideally, fewer shares will drive up the price of those that remain.
Perhaps the biggest unfortunate blow against Royal Dutch is the news that it remains a client of a spying company known as Hakluyt & Company Ltd., a subsidiary of Holdingham Group Ltd. This news is sure to bode ill for the company and its stock value, in my opinion. More than anything, this news represents a buying opportunity because it does not materially affect the company's intrinsic value.
Thus, for now, PetroChina has become the world's biggest producer of oil, according to Bloomberg. While this sounds great to shareholders, I believe that this rise in status has more to do with Exxon's continued turn toward natural gas than to any expansion on PetroChina's part. The company's net income actually dropped 5% for fiscal 2011, so there is hardly any evidence that it is doing particularly well in terms of income.
All of these circumstances could explain the oil stocks' tendency to stagnate. Investors are unsure where natural gas prices are headed, and total oil production still faces heady obstacles in the permitting process, particularly in the Gulf. Thus, rather than E&P companies, oil service companies have managed to keep growing, and one worth highlighting is Ensco (ESV). With the recent purchase of an additional ultra-deepwater drillship and the price of oil on the rise, Ensco has successfully stayed out of the unflattering spotlight that most oil companies fall under from time to time, when operations go wrong. Therefore, oil service companies might be the one subsector in the industry that has effectively managed growth in a way that is sustainable.
For investors, I think these uneasy trends mean that even the big operators like Exxon and PetroChina might not be the best bet for reliable returns beyond their dividends. It might be time to start looking elsewhere for stocks that will be consistently profitable over the long term.