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Small Shale Companies Outperforming Big Oil

Oil explorers focused on high-margin
shale drilling from Texas to North Dakota are set to outperform
Big Oil this year.

EOG Resources Inc. (EOG), Pioneer Natural Resources Co. (PXD) and
Continental Resources Inc. are poised to reap bigger returns for
investors than energy titans 15 times their market values as
they devote almost all their drilling capital to higher-margin,
domestic crude wells, said Gianna Bern, founder of Brookshire
Advisory and Research Inc. in Chicago. Houston-based EOG is
estimated to more than triple profit in 2013 to $1.92 billion.

The domestic price rally “is bullish for U.S. shale
development and benefits producers with a high U.S. production
profile,” Bern, a former BP Plc (BP/) crude trader, said in a
telephone interview. U.S. shale “is where the growth is.”

West Texas Intermediate, the benchmark crude for onshore
U.S. oil, has risen 16 percent this year as new pipelines and
rail links eroded a supply glut in the Great Plains. London-traded Brent, the basis for two-thirds of international prices,
fell 1.9 percent, undermining major international producers and
contributing to second-quarter earnings from Exxon Mobil Corp. (XOM)
and Royal Dutch Shell Plc (RDSA) that disappointed investors last week.

Exxon and Shell already are lagging behind some of the
dominant domestic shale explorers in delivering returns to
investors. Pioneer has risen 70 percent this year, while
Oklahoma City-based Continental has increased 33 percent. EOG,
the biggest owner of drilling rights in the Eagle Ford Shale in
southwest Texas, has risen 27 percent.

Lagging Returns

By comparison, Exxon has gained 6.2 percent this year,
while Shell fell 0.9 percent.

While Shell and Exxon’s profits were also diminished by
shrinking margins from refining crude into transportation fuels,
shale will be the driver for performance in energy-company
earnings reports scheduled this week. Unit Corp. (UNT), a Tulsa-based
owner of drilling rights in the Bakken shale, is expected to
post its highest second-quarter profit in two years this week,
according to analysts’ estimates compiled by Bloomberg.

That compares to a 57 percent plunge disclosed by Exxon and
a 20 percent decline by Shell last week.

Pioneer, which shed deepwater Gulf of Mexico and African
discoveries in recent years to focus on U.S. onshore drilling,
boosted production by 17 percent and posted the biggest second-quarter profit in company history last week. The stock surged 13
percent on Aug. 1, the most since November 2011, after the
Irving, Texas-based producer reported a pair of drilling
successes in Texas’s Wolfcamp formation.

Record Profit

Halcon Resources Corp., the oil and gas producer run by
former Petrohawk Energy Chairman Floyd C. Wilson, posted record
quarterly profit on Aug. 1 after a five-fold increase in output
from wells, according to data compiled by Bloomberg.

EOG and Unit are scheduled to announce second-quarter
results on Aug. 6. Continental follows the next day.

The world’s biggest energy producers, including Exxon and
Shell, have had mixed results while playing catch-up to smaller
U.S. explorers that helped pioneer shale exploration.

Shell, Europe’s largest energy producer by market value,
wrote down the value of its U.S. shale assets last week for the
second time in less than a year, while saying its liquids-rich
properties in Texas’ Permian Basin are “developing very well.”
Natural Gas, the worst-performing commodity of the past half
decade in U.S. markets, accounts for more than 80 percent of the
output from The Hague-based company’s shale wells.

Exxon’s Investment

Exxon spent $52 billion in the past three years to create a
shale portfolio, though most of it has involved gas that tumbled
to a 10-year low in 2012 and commands less than one-fifth the
price of oil, on an energy-equivalent basis. During a conference
call with analysts last week, Exxon touted its progress in
ramping up output 74 percent from a year earlier to 60,000
barrels a day in the Bakken formation that sprawls beneath North
Dakota and Montana.

ConocoPhillips raised its full-year production estimate to
as much as 1.53 million barrels a day after unexpectedly
reporting an output gain on Aug. 1, citing growing supplies from
shale. Apache Corp. Chairman and CEO Steven Farris told analysts
during a conference call last week that the Houston-based
company is reaping 30 percent rates of return on wells in the
Wolfcamp Shale.

‘Weak Spot’

The so-called integrated model encompassing every facet of
the oil industry from wells to retail filling stations is
hurting the largest international companies, said Edmund Cowart,
who helps manage $22 billion at Eagle Asset Management Inc. in
St. Petersburg, Florida.

Refining was the “weak spot” in Exxon’s quarterly
earnings with profit in the segment dropping 94 percent, Brian Youngberg, an analyst at Edward Jones & Co. in St. Louis, said
in a telephone interview. He rates Exxon a hold.

Shell cited the shale writedowns and oil theft in Nigeria
after it missed earnings estimates, prompting shares to fall the
most in two years.

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