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.
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?
catengineer,
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.
Ed,
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.
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 & STL,
My target to buy RYN, which I stated previously, is $41.
catengineer,
Do I need to repeat the time-worn phrase about past results?
Would anybody care to hazard a “target” price for RYN??
Catengineer…
Thanks a bunch for the link since I definitely fall in the “retired” category! 🙂
For any retired dividend seekers….
http://news.morningstar.com/articlenet/article.aspx?id=329037&pgid=rss
Ed,
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.
Run26.2,
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)?
confirmation of Jim’s thesis on Big Oil:
http://www.bloomberg.com/apps/news?pid=20601109&sid=acubV2MKZMA0&pos=10
amtrend10,
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.
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.
gusspresso24,
Thanks! I hadn’t realized Jim had been sitting on RYN that long.
kenfreck,
Excellent point about the discount. Unfortunately, anything paying a good dividend these days is getting premium pricing.
catengineer,
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.