It was a tale of two companies during last week’s earnings deluge. On one side, bloated, Big Oil struggled to deliver results. On the other, nimble, mid-sized energy companies posted the growth investors crave. Welcome to the era of ‘Medium Oil.’
Poor results from the majors
Last week’s quarterly results from Big Oil – British Petroleum, Chevron, Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and Exxon Mobil Corporation (NYSE:XOM) — only confirmed that these companies are running frantically just to stand still. Today, the four oil majors produce roughly 13.6 million barrels of oil equivalent per day. Five years ago, that figure was about 300,000 barrels higher.
Big Oil’s dilemma is that every time a barrel of crude is pumped out of the ground, it has to be replaced. To grow, these companies need to discover more than one barrel of oil for every one pumped. That’s becoming an increasingly difficult task in a world running out of easy, conventional reserves.
Take Exxon Mobil Corporation (NYSE:XOM) for example, which produced 1.6 billion barrels of oil equivalent last year. To replace these lost reserves and grow production, the company must find the equivalent to three ConocoPhillips every year. To accomplish this, Exxon Mobil Corporation (NYSE:XOM) has spent over $100 billion over the last five years to find and exploit new energy sources. Yet, in spite of this, the company’s production has been essentially flat since 2003.
Slow production growth combined with a failed bet on natural gas is putting the squeeze on Exxon Mobil Corporation (NYSE:XOM)’s cash flow and forcing the company to cut back on its share buyback program. Little wonder why shares fell 2% after the company reported results.
Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has fared even worse with the company writing off $2.1 billion of its North American shale assets. This should suggest to investors during the company’s hasty rush into the shale bonanza, it picked up some inferior assets. The strain of growing output has proved so challenging, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has stopped providing production guidance for investors.
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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