Forget about Big Oil this year and focus your attention on those smaller US-shale-focused players because they have begun to outperform the big boys and we expect much better returns for investors. So if you want bigger returns this year, you have to look smaller. And we can find you a handful of smaller players focused on US shale set up to earn bigger profits for investors than the supermajors. If you need more convincing, check out the second-quarter financials coming out now and compare them with the supermajors. They paint a very interesting story.
Why are the smaller players outperforming the giants?
• They are spending on high-margin drilling from US crude wells
• They are focused on the US, where shale growth is clear, either staying put to the US altogether, and sticking to shale, or having divested their overseas and offshore assets to raise cash
• The transport glut has eased a bit, leading to a 16% rise in the WTI, while London-traded Brent has fallen about 2.2% (this is wrong-footing the supermajors)
• They aren’t “integrated” like the supermajors, so they’re not taking a hit on poor-performing sectors like refining
Who to Watch
EOG Resources Inc. (EOG)
This is THE biggest player in the Eagle Ford shale in Texas, and its profits are expected to triple this year. We’re looking at over $1.9 billion in profits by year’s end for the Houston-based company. The company has risen 28% this year, and while it’s not as amazing as the rise for some of the others on our list here, it’s still one of the biggest drillers in Eagle Ford, so 28% goes a long way. Beyond this, we’re looking at a potential 4,900 more wells in Eagle Ford. This would give EOG 8% of the shale’s total estimated output.
Pioneer Natural Resources Co. (PXD)
Pioneer has risen a whopping 68.8 this year, and the key to this Irving, Texas-based company’s success has been a narrowing shift in focus. Pioneer didn’t always stick to the US, and even in the US it wasn’t strictly focused on shale, but it’s gotten rid of its expensive offshore endeavors in the Gulf of Mexico and its assets in Africa. That was the right move: it led to a 17% increase in production and concomitant surge in stock by 13%.
The narrowing of focus to US shale led to a really nice drilling coup in the Wolfcamp formation in Texas. It’s now posting its highest profits ever. Pioneer may actually be the most attractive of these offerings because its assets are concentrated in the Permian and we like where Sparberry and Wolfcamp are heading. Wolfcamp has 50 billion barrels of oil equivalent, and that’s double Eagle Ford. So Pioneer may be the best bet in the longer term. The company has some extremely ambitious plans: up to 40,000 new wells to be drilled and a potential 9 billion barrels of oil equivalent from them.
Let’s look at Pioneer’s second-quarter earnings, then. The short story is Q2 net income for common stockholders of $337 million ($2.40 per diluted share). Adjusted income for Q2 was $154 million after tax ($1.10 per diluted share), minus noncash derivative gains.
Continental Resources Inc. (CLR)
This Oklahoma-based company has gone up 32% this year, riding high on its status as the top producer and driller in Bakken. Continental is eyeing more than 19,000 new wells in Bakken, plus it racking up things in Oklahoma. Projections are that it could triple production by 2017. Second-quarter earnings should show $1.25 per share on revenue of $853.42 million.
Halcon Resources Corp. (HK)
We’re pretty upbeat on Halcon, even if everyone doesn’t agree. Halcon’s Q2 earnings missed a bit, coming under $.06/share estimates at $.04/share. But revenues were $214.3 million—above estimates of $208.55 million. Q2 net income was $16.8 million, compared to $2.8 million for Q2 2012. The company as a really nice asset base that is rich in liquids, and spread out among a handful of prime US shale plays. Halcon has massive assets in Eagle Ford, Bakken and Utica.
Bottom Line: The majors were late to this game, and now it’s still all about the little guy who is reaping profits and rewarding investors like never before. This year will continue to be a great one for these small players with liquids-heavy US shale assets, nice chunks of acreage in the biggest-producing and emerging basins, and a clean and narrow focus at home and upstream.