Rethinking the oil company business model is not a new phenomenon, and to a certain degree one can attribute some of the recent corporate moves to the growing and perceived success of the American shale revolution. In 2011, ConocoPhillips elected to split its company into an exploration and production-focused company and a downstream-focused company. The split was completed at the end of April 2012 and new management took over running the businesses. The split enabled the E&P business to focus its efforts on growing its liquids output following the company’s untimely investment in dry natural gas with its 2005 purchase of Burlington Resources. That deal boosted ConocoPhillips’s gas reserves by 88% and its gas production by 77%, making the company the second largest natural gas producer behind BP Ltd. At year-end 2013, ConocoPhillips reported that its organic oil and gas replacement ratio had reached 179% of last year’s production. It also highlighted that production in the Eagle Ford, Bakken and Permian, three attractive liquids-rich plays, had increased by 31% last year. These three areas are highly favored by investors who boost the value of companies active in the plays.
Three majors: XOM, Royal Dutch Shell, and CVX; two smaller majors: COP, and MRO.
Over the two-year period ending February 2, 2014, the Standard & Poor’s 500 Index produced the highest return to shareholders. While underperforming for most of the first half of 2013, ConocoPhillips actually matched the S&P 500 performance by the end of the year only to drop as we entered 2014. The two worst performing stocks for the entire period were Marathon and Royal Dutch Shell. Their performance convergence by early 2014 was due to the extended slide by Marathon from late fall and the rise in Shell’s share price toward the end of the year as shareholders turned more optimistic about the company’s future under its new leader. The shares of ExxonMobil and Chevron converged at the end of 2013 as ExxonMobil’s share price was boosted by the revelation of a significant new investment by Warren Buffett’s Berkshire Hathaway. Up until that revelation, Chevron had outperformed ExxonMobil for virtually all of 2013.
A mid-December Lex Column in the Financial Times asked the question “Why own shares of Big Oil?” The writer offered an explanation – the integrated model generates enormous amounts of cash, and implicitly attractive organic returns.
“What matters now is to rein in capex and start focusing on returns. This will happen in two ways. One is by asset disposals – 2014 could see a flood of oil and gas assets come on the market. The other is through a clampdown on capex and greater control of costs.” It is rapidly becoming clear that both of these strategies will be executed this year and likely for a while longer.
At the same site, there is a long analysis of what the recent Nebraska ruling means for TransCanada's Keystone XL 2.0 North: a) breathing room for President Obama; and, b) unlikely that the Nebraska PSC won't rule on the new route for at least seven (7) more months. Yes, seven more months.
Nebraska judge Stephanie Stacy struck down a state law on Wednesday that allowed Governor Dave Heineman to approve the Keystone pipeline's path through the state. TransCanada may now have to submit an application to the Nebraska Public Service Commission, and the agency's decision could take seven months or more. Stacy's ruling has also been appealed by the state's attorney general on behalf of Governor Dave Heineman, but it is uncertain how long the legal process will take.Obviously the legal maneuvering will take longer than the 7-month waiting period for the PSC to act.
There is nothing in the Nebraska ruling that prevents the State Department from continuing the 90-day national interest determination that is now in its third week. Eight federal agencies including the Departments of Defense, Commerce and Transportation and the Environmental Protection Agency are working with the State Department to determine whether Keystone would benefit the U.S. economy and energy security. Any delay by the Obama administration would more likely come after the agencies have made their assessment, analysts said. Secretary of State John Kerry is expected to make a recommendation toObama but has no firm deadline to do so.