• Energy and Income Advisor
  • Conrads Utility Investor
  • Capitalist Times
  • Twitter
  • Seeking Alpha
  • Roger S. Conrad

More CAPEX, More Problems: A Survey of Big Oil

By Peter Staas on Oct. 1, 2014

The High Cost of Negligible Production Growth

The Seven Sisters expanded their capital expenditures by 87 percent between 2005 and 2008, took a two-year breather after commodity prices collapsed in early 2009, and grew their expenditures by another 27 percent from 2011 to 2013.

(Click graph to enlarge.)
IOC Capex vs Production 10-Yr History

Needless to say, the payoff from these investments has underwhelmed. Over the past decade, the West’s major integrated oil companies grew their total capital expenditures at an average annual rate of 20 percent to effectively maintain their hydrocarbon output. Our next set of graphs breaks out the spending and production histories for each of the seven major integrated oil companies.

(Click graph to enlarge.)
CAPEX by IOC -- 10 Yr History

However, the only meaningful production growth that the Seven Sisters have delivered over the past decade came from large acquisitions: Statoil in 2007 merged with Norsk Hydro’s oil and gas division, and Exxon Mobil in June 2010 bought leading shale gas producer XTO Energy for $35 billion.

(Click graph to enlarge.)
IOC Production -- 10-Yr History

Also note that Exxon Mobil’s hydrocarbon production failed to leverage what many regard as one of the worst-timed acquisitions in recent history into sustained production growth.

Within two years of purchasing XTO Energy, surging production and the no-show winter of 2011-12 sent North American natural-gas prices plummeting below $2.00 per million British thermal units.

Although the price of this thermal fuel has recovered from ultra-depressed levels to depressed levels, Exxon Mobil has dramatically scaled back drilling activity in Louisiana’s Haynesville Shale and other acreage acquired in the deal.

To an extent, the Seven Sisters’ challenges reflect the curse of large numbers. By dint of their size, these energy giants must pursue high-impact exploration and development projects to replace reserves, offset the natural decline rate in their legacy production bases and deliver a modicum of output growth.

And these high-impact exploration and development projects carry a hefty price tag and take multiple years to complete. Check out this graph tracking the major integrated oil companies’ average annual finding and development costs, a metric that represent the expense associated with adding 1 barrel of oil equivalent to reserves.

Energy & Income Advisor

Your complete guide to energy investing, from growth stocks to high-yielders.

In October 2012, renowned energy expert Elliott Gue launched the Energy & Income Advisor, a twice-monthly investment advisory that's dedicated to unearthing the most profitable opportunities in the sector, from growth stocks to high-yielding utilities, royalty trusts and master limited partnerships.

Subscribe today to receive a sample issue of EIA
  • Live Chat with

    Elliott and Roger on May. 30, 2017

  • Portfolios & Ratings

    • Model Portfolios

      Balanced portfolios of energy stocks for aggressive and conservative investors.

    • Coverage Universe

      Our take on more than 50 energy-related equities, from upstream to downstream and everything in between.

    • MLP Ratings

      Our assessment of every energy-related master limited partnership.

    • International Coverage Universe

      Roger Conrad’s coverage of more than 70 dividend-paying energy names.

    Experts

    • Roger S. Conrad

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Elliott H. Gue

      Founder and Chief Analyst: Capitalist Times and Energy & Income Advisor

    • Peter Staas

      Managing Editor: Capitalist Times and Energy & Income Advisor