U.S. OIL & GAS THREATS
While international exploration and production companies have been underperforming in recent years, some of their US counterparts have been impressive.
There have been good returns for some investors in the US E&P sector, but they had to be in the right companies at the right time.
The US shale revolution has been a story of technological progress, and as in any such period of rapid advance, it made a big difference whether or not you had the right technology as well as market position, including the right access to resources through lease agreements.
It was the smaller and midsized independent E&P companies such as Devon Energy and Chesapeake Energy that pioneered the first shale gas boom, and similar entrepreneurial companies such as EOG Resources and Continental Resources that led the subsequent opening up of shale oil.
As is often the case, however, the standard-bearers of the revolution were not always the ones that benefited most. By creating additional supply, the shale boom knocked away the support under North American natural gas prices, hurting the profitability of companies that made most of their income from selling gas.
Chesapeake, for example, embarked on rapid debt-fuelled expansion under Aubrey McClendon, its chief executive until last year. Since then, his successor Doug Lawler has been working to clear up the mess. The shares have risen 57 per cent in the past five years, lagging well behind the S&P 500 index, which has more than doubled over the same period, rising 113 per cent.
Devon, which has had a less dramatic record, has similarly underperformed the index, its shares rising 47 per cent.
However, companies that were less reliant on gas production, and moved more quickly into oil, have done much better. EOG's shares are up 244 per cent in the past five years – more than double the rise in the S&P 500, while Continental's are up more than fivefold, rising 470 per cent. Among the gas specialists, the lowest-cost operators of the Marcellus Shale of Pennsylvania are among the best performers, including Cabot Oil & Gas, up 347 per cent in five years, and Range Resources, which is only up 110 per cent, in line with the wider market, but has still outpaced several of its peers.
The outlook depends largely on what happens to the oil price. If turmoil in the Middle East and other regions continues to keep oil prices high, then the US oil-producing E&P sector will continue to thrive. If the price drops sharply – because of an abrupt slowdown in demand in China, say – then the US industry will be in for a rough ride. Harold Hamm, chief executive of Continental, has warned that at $70 per barrel much of the present US shale oil industry would not be economically viable.
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