By Daniel Gilbert
Giant oil companies are weathering the oil slump better than the average shale driller, but even their famous stability is at times being surpassed by much smaller companies that own some of the choicest U.S. oil-and-gas fields.
Take Cimarex Energy Co., which drills in Texas and Oklahoma. The oil producer's stock price has fared better than that of Chevron Corp., the second largest American oil company by revenue, since crude-oil prices started crashing last June. Shares of Diamondback Energy Inc., an eight-year-old oil producer with a $4.3 billion market value, have held up almost as well as Exxon Mobil Corp.'s over that stretch. And as of this week, Cabot Oil & Gas Corp., a Houston-based shale-gas specialist, had bested all the big oil companies in stock-market performance since last summer when the price of crude first began to crash.
Diamondback, Cabot and Cimarex tend to carry less debt than their peers and can coax fuel out of the ground at a lower cost. It is a combination that has proved at least as attractive as the deep pockets of the world's biggest oil companies over the last year as U.S. crude prices plunged by more than 50% to less than $50 a barrel.
The three shale specialists have seen their shares fall between 20% and 30% since. By contrast, an index of 21 U.S. energy companies, almost all of them oil-and-gas producers, has declined 52.3% over the same period.
"There have been a handful that have bucked the trend," Chad Mabry, an analyst at MLV & Co., said of the best-performing shale drillers.
It isn't clear how long the stars of U.S. shale drilling can rival the industry's heavyweights. These giant oil companies like Exxon and Chevron, which report quarterly profits on Friday, are helped by enormous cash flows and easy access to credit.
The share-price buoyancy of elite shale drillers, including EQT Corp., Concho Resources Inc. and EOG Resources Inc., could be a sign that investors are betting on a rebound in oil and gas prices. Or it might reflect a bet that some of the smaller, most efficient players will be bought at a premium by the big oil companies, said Doug Terreson, head of energy research at Evercore ISI.
As the oil behemoths report earnings this week, analysts expect the companies to cushion the blow of cheap crude by reaping higher profit margins from refining it into gasoline and diesel. Such built-in hedges, combined with hefty dividends, have helped the biggest energy companies stem falling share prices better than most small and midsize U.S. drillers like Apache Corp., Marathon Oil Corp. and Hess Corp.
Yet even Exxon, Chevron and Royal Dutch Shell PLC are grappling with how to improve profits when tapping new sources of oil and gas has become increasingly expensive. The three biggest Western oil firms are all running a cash-flow deficit as a result of heavy capital spending and dividend payments. Chevron has said it isn't likely to plug the gap until 2017.
An Exxon spokesman referred to comments made by its chief executive earlier this year, saying the company's business model gives it a competitive advantage. Chevron and Shell declined to comment.
Wood Mackenzie, an energy consultancy, estimates that big energy companies have delayed spending about $200 billion on big-ticket oil-and-gas developments since prices began to fall last year. If the delays continue, they may struggle to boost their output and cash flow.
"You can legitimately question the growth potential for pretty much every one" of the big oil companies, said Guy Baber, head of integrated company research at Simmons & Co. International. By contrast, investors have flocked to shale drillers that operate with the greatest efficiency and promise to increase output.
Diamondback focuses on the Permian basin, a vast oil-producing region in West Texas, and touts its fast drilling and ability to make money at oil prices as low as $30 a barrel. It booked a $6.4 million profit on $101.4 million in revenue in the first quarter of 2015, and expects to increase production by roughly 50% this year. Its shares are down about 25% since oil prices peaked last June.
Standard & Poor's upgraded Diamondback's credit rating in April as it increased oil and gas production, one of the few drillers to get such a boost amid the downdraft in oil prices.
Diamondback didn't respond to requests for comment.
Shares of Cimarex, which also drills in the Permian, are down about 25% since last June. The company lost $414.9 million in the first quarter, largely due to a $603.6 million noncash write-down on the value of its oil and gas properties, and is scheduled to report second-quarter earnings on Aug. 4.
"Our sizable portfolio has strong rates-of-return which provide us multiple opportunities to grow and add value, even in challenging times, " said Tom Jorden, Cimarex's chief executive.
Cabot Oil & Gas has a sizable oil operation in South Texas but still makes most of its money tapping natural gas in Pennsylvania's Marcellus Shale, which has helped buffer it against crude's steep drop in price. Cabot pumped more gas but sold it for less money in the second quarter, posting a loss of $27.5 million; the company remains profitable for the first half of 2015. Natural-gas prices are down about 24% from a year ago, while crude-oil prices have halved over that stretch.
Analysts at Barclays praised Cabot's ability to make money in tough times, but warned that its stock is valued at a 40% premium to its average peer. The bank said it's "cautious about the size of this premium."
"The key for us at Cabot is to manage our operations and our finances so that price disruptions can be managed effectively," said George Stark, a Cabot spokesman.
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