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Oil drilling failure rate surges at the Western majors

posted on March 9, 2010 at 12:35 pm
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It’s not a factor now in the climbing price of oil but the trend certainly doesn’t portend cheaper oil down the road. Or a rosy future for the Western oil giants.

In 2009 Chevron’s (CVX) drilling failure rate climbed to 35%. More than one-third of exploratory wells came up dry. That compares to a 10% failure rate in 2008.

And that’s by no means an isolated increase in the drilling failure rate. ConocoPhillips (COP) saw its failure rate climb to 43% in 2009 from 32% in 2008.

Higher failure rates mean that it gets more and more expensive to find new oil to replace what’s been pumped out of the ground. Chevron’s target is a modest 1% increase in oil and gas production this year. ConocoPhillips is forecasting a 2.7% drop in production in 2010.

The reasons for the climbing failure rate are pretty simple.

The countries that sit on the world’s most promising areas for new exploration are keeping more and more of that geology for national oil companies. That limits Western oil majors to a few countries with promising geology and a lot of marginal and already explored regions. For example, in 2009 Chevron drilled almost half of its dry holes in the United States.

The response by the Western oil majors has been to buy instead of explore and to go for the gas.

Western integrated oil companies announced almost $100 billion in acquisitions in the last 12 months, according to Bloomberg. That’s a 53% increase for the previous 12 months.

Many of these deals, such as ExxonMobil’s (XOM) $29 acquisition of XTO Energy (XTO), have focused on natural gas from unconventional geologies such as the Barnett Shale formation in Texas.

That shift will have an effect on revenue and earnings at Western majors if oil prices keep headed higher while natural gas prices stay in their current slump. Increasingly what we think of as the oil industry—the Western majors such as ExxonMobil, Chevron, BP (BP), Royal Dutch Shell (RDS), ConocoPhillips, etc.—doesn’t look like the best way to invest in increasing demand and higher prices for oil.

The few state-owned oil companies that allow individual investors to buy shares—Petrobras (PBR) and Jubak’s Picks Statoil (STO)—look like a better alternative in the long run.

Full disclosure: I own Statoil in my personal portfolio.

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  • EdMcGon on 9 March 2010

    Does this make natural gas a more attractive long term investment? If you look at the natural gas chart, it’s been having an ugly drop for some time now.

  • machiavelli1079 on 9 March 2010

    Hi Jim,

    As recently as Dec 8th posting, you disclosed that you owned Petrobas in your personal portfolio – I do not see the same disclosure here – do you no longer own Petrobas, and if not, what made you re-think your position?


  • creativekev on 9 March 2010

    Hi, EdMcGon and SeaTurtleLady,

    Regarding your posts last Fri on AOD: I’m new to closed end funds and read some info on it at

    and have 3 questions (Sorry for the off-topic post):

    (1) Just wanted to verify that you buy and sell a CEF like AOD just like stocks, so the buy and sell brokerage commissions would be the same as stocks.

    (2) Although it’s attractive to buy AOD for the high dividend (you got my interest piqued there), from the Wikipedia article it seems like it could be hard to sell at a ‘good’ price when you need to, because a CEF “may not liquidate in your timeframe and you may be forced to sell at an even worse discount”. Since I’m thinking of AOD as a place to park my cash and need the liquidity, could this be a problem?

    (3) Could you point me to a good info Web page for AOD (or CEFs in general)? AOD’s page on Yahoo Finance has a ‘N/A’ for most metrics, even the dividend yield shows a ‘N/A’.

    Thanks very much.

  • EdMcGon on 9 March 2010

    (1) Yes, at least my brokerage looks at them that way.

    (2) It depends on your timeframe, and the specific CEF. In the case of AOD, I highly doubt I’ll still be in it at the end of this year (although I reserve the right to change my mind on this).

    (3) You’re right about the “N/A”. I checked a few websites, and most of the freebie stock websites don’t list anything. The only thing I can suggest is to check out the literature at the Alpine website: http://www.alpinecef.com/
    They also have SEC filings, so you can always see those at Edgar Online if you don’t trust the Alpine info.

  • Seaturtlelady on 9 March 2010

    Actually, I pay 12.99 to buy and 12.99 to sell for each individual stock. For buying AOD, I was charged 9.99. All of this done through Etrade for me!

  • Srian on 9 March 2010

    How would increasing oil prices adversely affect the big oil companies revenues? Agreed they will be pulling less oil from the ground but wouldn’t they be getting paid more (relative to the past) for that oil? I can see their earnings getting hit if Oil crashes to $30 or so but if oil heads higher wouldn’t they make more money. Are you making the assumption that the oil reserves of big oil companies will fall at such a drastic rate that it would not be offset by the increased oil prices?

  • Seaturtlelady on 9 March 2010


    If and when you decide to sell AOD would you give me a heads up if something is amiss that I’m not aware of??

  • EdMcGon on 9 March 2010

    Here’s the funny thing: When money inflation raises the price of oil, the oil companies get to take advantage of the more expensive oil without any cost to them. But when the cost of getting the oil out of the ground increases, THEN it increases their overhead, and decreases their profit margin.

  • creativekev on 9 March 2010

    Thanks, EdMcGon and SeaTurtleLady.

    I’m still not fully understanding the risk to my principal based on my timeframe for selling. Let me ask the question this way: How would AOD compare to a money-market fund? If I sell a money market fund, I know for sure (or virtually sure) that I get back my principal – and this is regardless of when I choose to sell. Is this the case with AOD (or any CEF)?

  • EdMcGon on 9 March 2010

    Of course. I always mention my buys and sells in here.

    The only buy I didn’t mention in the last week was New Energy System Group (NEWN). It’s a Chinese battery manufacturer. It’s a stock I’ve followed since last summer. It’s a solid company with some pretty financials, but rather small, although still growing.

  • Seaturtlelady on 9 March 2010


    I’m sure that when I sell my AOD, I will get the market value much like a stock sell. EdMcGon correct me if I’m under the wrong assumption here!

    Shame, shame, shame for missing a post on NEWN. Now, it’s time for me to go do my homework! chuckling…

  • EdMcGon on 9 March 2010

    That’s a good comparison. However, unlike a money market fund, the value of your underlying principal can go up and down as the CEF is traded.

    The better comparison is to open-ended funds, or mutual funds as they are better known.

    When you buy a mutual fund, “shares” are created by the fund’s company. When you sell a mutual fund, the fund’s company buys them back. Unlike with stocks, no shares are actually “traded” (or should I say “exchanged”?). With a CEF, the shares are traded more like a traditional stock holding. A CEF’s price is based on the trading value, whereas a mutual fund’s price is based on the value of the fund’s investments.

    Hold off on NEWN for a little bit. Let’s see how the whole China peg situation shakes out first.

  • wwweng on 9 March 2010


    For a CEF, it has a Net Asset Value (NAV) which is its underneath value, think about the “book value” in stock. And, there is the share price which is like the stock price. The price will be different from NAV. A CEF trades like a stock. You buy and sell a CEF based on the share prices.

    If you want more info on AOD, try this link:

  • Seaturtlelady on 9 March 2010


    Is there any other company that pays “good” monthly dividends besides AOD. Outside of AOD, I’m paid quarterly dividends but no where near the percent that AOD is paying!! RYN would be right up there if I had as many shares as AOD.

  • creativekev on 9 March 2010

    I got it now. Thanks again EdMcGon and Seaturtlelady.

    Ed – so the high dividend in AOD is offered in return for the risk of fund price fluctuations. This is just like stocks. Thanks. I think since CEFs seem like such strange creatures to me (because I haven’t invested before and they’re relatively undercovered in the financial media), it took me some time to get my head wrapped around the concept right.

  • creativekev on 9 March 2010


    Thanks. Now I’m getting it. A CEF does sound just like a stock in terms of buying and selling.

  • EdMcGon on 9 March 2010

    Actually, RYN might be a good buy soon, once it pays it’s monthly dividend. I expect it could drop to the $40-41 range. I’m putting in a small buy order at $41.

    As for companies, I’m unaware of any companies that pay dividends like AOD does. Most of the CEF’s I’ve seen that were comparable tend to have real estate holdings as their investment. I try to avoid actual real estate until the real estate market settles down.

  • Seaturtlelady on 9 March 2010


    I can NOT believe you just mentioned RYN, because on Etrade it’s been downgraded to a sell which made me wonder if I should sell my 50 shares that is showing an 85% gain or would it be wiser to just sit and collect a quarterly dividend?? What say you??

  • EdMcGon on 9 March 2010

    You may want to take another look at RYN in your picks list. You bought it at $46.02, with a target price of $46.00? I figure that’s either a typo, or you were looking for a tax write-off?

    At it’s current price, I’d call RYN a “hold”. If it drops to $41, I’d call it a “buy”. Enjoy your dividend.

  • catengineer on 9 March 2010


    Check out HCN.

  • EdMcGon on 9 March 2010

    HCN is only a 6.2% DY.

  • bsdgv on 9 March 2010

    Can someone please explain???…
    Considering how high the drill failure rate is, one wonders what Schlumberger’s “3D and time-lapse (4D) seismic surveys” are good for.

  • EdMcGon on 9 March 2010

    Is there a geologist in the house?

  • catengineer on 9 March 2010

    I’m aware of that….but it’s better than the 4.6% DY of RYN that is getting a lot of attention in these threads.

  • kenfreck on 9 March 2010

    Morningstar have a discussion board with lots of ideas on AOD. Try buying CEFs when they are trading at a discount. Just as with stocks…..you do not want to pay a premium. Paying $1.50 for a $.1.25 stock.

  • creativekev on 9 March 2010


    Thanks for the tip. I should have thought of Morningstar – I look at mutual fund data there.

  • gusspresso24 on 9 March 2010

    Hey Ed,
    RYN might not be a typo actually. If this is the same Buy leftover from his purchase on Nov 9th, 2007 (when it was trading at a price of $46.02), he could have held it through the economic collapse and has been waiting for it to recover. His updated target price for the company is $46 set on Sept 18th, 2009.

    This assumes that this article: http://jubakpicks.com/2007/11/09/buy-rayonier-inc-ryn/
    has a correct date though, and ignores the text inside the article that says “As of July 2 I’m raising my target price to $39 a share by December 2009″

    I’m thinking some of the articles/dates got criss crossed when the s/w guy back loaded Jim’s previous articles from MSN days. There does seem to be a typo somewhere. I think he’s had RYN for awhile though.

  • Run26.2 on 9 March 2010

    A few of seismic stocks that I own that might be worth a look are GOK, TGE & IO. I’ve been debating whether to add or sell in these, but may hold off now based on Jim’s post, as this would seem to support the potential for additional seismic work.

  • Srian on 10 March 2010

    The days of $3 gas are going to be back if the energy dept is to be believed.Time to start looking at Valero and Tesoro?

  • YX on 10 March 2010

    Thanks for the update. How do you think about TOT?

  • EdMcGon on 10 March 2010

    Keep in mind, a dividend is a feature of a stock, not the whole tamale. In the case of RYN, it’s a good stock without the dividend. WITH the dividend, it becomes a great stock. I wouldn’t say the same for HCN.

    AOD is the exception to what I just said, because the dividend is exceptional, and it’s a CEF, not a company.

  • EdMcGon on 10 March 2010

    Thanks! I hadn’t realized Jim had been sitting on RYN that long.

    Excellent point about the discount. Unfortunately, anything paying a good dividend these days is getting premium pricing.

  • amtrend10 on 10 March 2010

    As this Real Estate mess slowly clears, I have one eye on REITS. If business and inventories expand so will the industrial RE market. If consumer spending increases so will the commercial RE market. I can honestly say in the last 10 years REITS have presented me with my largest and most enjoyable tax problems.

  • EdMcGon on 10 March 2010

    You bring up an interesting subject: taxes.

    My own view: I’d rather pay taxes on a profit than get a deduction for a loss.

  • Run26.2 on 10 March 2010
  • EdMcGon on 10 March 2010

    Right now, the oil prices are at the top of a trading range they’ve been trapped in for about 9 months. Ever since Jim posted that news, and your link adds to it, I have been wondering if oil will break out?

    Last March, oil jumped, then traded in a range until May, when it jumped again. It dropped in July, then went back up, hitting roughly the trading range it’s in now.

    Does oil repeat what it did last March (except at higher prices)?

  • catengineer on 10 March 2010


    I understand what you’re saying but to me it’s about % return + dividend. Over the past 5 years RYN is up 32.86%….HCN is up 36.6% (not including the 1.67% higher dividend). Also, during that same period, RYN peaked at a little over $48/share while HCN peaked at $53/share. Add that to the fact that HCN isn’t quite as high above it’s 50 and 200 DMA.

    All that being considered, RYN’s numbers do look good though, but I wouldn’t buy until it got down to the low-mid $41′s.

  • catengineer on 10 March 2010
  • Seaturtlelady on 10 March 2010


    Thanks a bunch for the link since I definitely fall in the “retired” category! :-)

  • Seaturtlelady on 10 March 2010

    Would anybody care to hazard a “target” price for RYN??

  • EdMcGon on 10 March 2010

    catengineer & STL,
    My target to buy RYN, which I stated previously, is $41.

    Do I need to repeat the time-worn phrase about past results?

  • elnormo on 10 March 2010

    Hi Jim,

    regarding oil prices. I understand that higher exploration and productions costs will squeeze the majors’ margins even if oil prices go up. So what about an oil ETF as an alternative?

  • catengineer on 10 March 2010

    I’m a step ahead of you this time….I actually had that in my original post, but took it and some other things out to shorten it up some.

  • EdMcGon on 10 March 2010

    I always like it when another person picks the same “buy” target I have. Either we’re both right, or we’re both wrong. But at least we’ll have company.

  • AdamE_123 on 11 March 2010

    If the drilling failure rate is riseing that seems like a good thing for companies who are profiting from the drilling? The higher the failure rate, the more times they will have to drill and more profits for companies like RIG?

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