Royal Dutch Shell plc (ADR) (RDS.A), Exxon Mobil Corporation (XOM): Why Bigger Isn’t Better in the Oil Patch

The rise of Medium Oil

In contrast to Big Oil, it was the medium-sized companies that delivered the best results last week. Strong growth in the Permian Basin drove Apache’s North American liquids production up 42% to 175,000 barrels of oil equivalent per day. Canada’s Suncor, with its assets in the Alberta oil sands, is on track to grow production 14% this year.

Who have been the best performers in the oil patch over the past five years? Mid-sized companies like EOG Resources and Continental Resources who are projected to deliver 30% and 40% production growth, respectively, this year. These were some of the first companies to capitalized on the North Dakota Bakken and Texas Eagle Ford.

Why such stellar performance? These firms have smaller bases from which to grow production, yet possess enough size to make their operations economical. For these companies, well placed bets can reward shareholders handsomely in contrast to Big Oil, where even great investments can fail to move the needle.

Foolish bottom line

In business, we might cheer for the underdog but understand that the favorite usually wins. Coca-Cola beats Jones Soda. Wal-Mart topples mom and pop. We might cheer for Rocky Balboa, but it’s Apollo Creed who wins the fight.

But this quarter proves that in the oil patch, scale is a liability. Once a company gets past a certain size, all of that mass just slows you down. Rather, investors should target the middle. We’re entering the era of ‘medium oil.’

The article Why Bigger Isn’t Better in the Oil Patch originally appeared on Fool.com and is written by Robert Baillieul.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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