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The Early Birds Are Reaping the Shale Oil Boom

11 October 2013 in Trading Ideas

We all know about the can’t-miss shale oil sector, right? The one that’s redefining American energy independence and delivering barrels of profit for oil and gas exploration companies?

Yeah. Try explaining it to Royal Dutch Shell and Exxon.

You see, for those two giants of the industry, the boom resembled more of a blip. Shell finally waved the proverbial white flag in early August when the company revealed that its US shale holding were worth $2.07 billion less than previously thought. The writedown contributed to the company’s second-quarter profit falling 60%, and forced the company to say it will consider selling some of its US shale properties.

Exxon, meanwhile, took a plunge into shale gas exploration in 2010, and is still feeling the effects, with a big exposure to consistently low natural gas prices.1

However, smaller oil companies used their nimbleness to be first into US fields, and have largely taken Big Oil out of the shale oil equation.

shale oil motifThe Shale Oil motif, a portfolio of 20 stocks of companies deriving a significant part of their revenue from shale oil, has gained 6.5% in the past month and has risen 31.6% so far this year. In those same periods, the S&P 500 is off 0.7% and up 15.1%, respectively.

Smaller oil companies have capitalized on drilling sideways through shale, breaking it up with a high-pressure stream of water, sand and chemicals, allowing oil and gas to flow.

As a result, exploration and production companies raised their oil reserves by nearly 3.8 billion barrels in 2011, the largest single-year increase since the government starting publishing the data in 1977.

Exxon and Shell have spent billions to acquire companies and drilling rights to shale discovered by others at a lower cost. But their sheer size also makes it harder for them to replace the reserves they deplete and increase their output, as the Wall Street Journal recently pointed out.

As for shale, “they [Big Oil] bought in late in the game, and it’s hit or miss,” Ken Medlock, senior director of the Center for Energy Studies at Rice University recently told the Journal. “Whether or not it pays off is going to be highly dependent on what happens to commodity prices.”

What has happened is crude oil prices haven’t really budged in about three months – a further suggestion that the advantage may continue to lie with the smaller players that have found a way to boost production more efficiently than the big boys.

1Daniel Gilbert, Justin Scheck and Tom Fowler, “Shale-Boom Profits Bypass Big Oil,” WSJ.com, Aug. 1, 2013.

Tags: shale oil