Some very interesting stats released last week by analysts at Evaluate Energy. Showing exactly why big oil has some big issues to deal with.
Evaluate crunched the numbers on 2013 spending trends from the "big four" oil firms: Shell, ExxonMobil, Chevron and BP. And found that these petro-players are today spending a lot more cash than in previous years.
For one, lifting costs rose significantly in 2013. With total expenses up 10% on the year, as compared to 2012.
The more telling stat is overall development costs. Which showed an even bigger jump.
As the chart below shows, total development costs for the four majors leapt by over $10 billion in 2013. All told, costs have risen by nearly $30 billion since 2011.
The rising trend is even more apparent when we look at per-barrel development costs (the orange line in the chart above). With this metric having nearly doubled since 2009--from $25 per boe to over $45.
This cost escalation has had a direct impact on the majors' bottom lines. With earnings for the four firms having slipped two years in a row, down by a combined $30 billion since 2011.
This data jives with what I've been hearing from the field. With an accounting source in the industry recently reporting that high operating costs (including soaring general and administrative expenses) have all but eaten up profits at one of the largest mid-tier E&Ps in the U.S.
This is a trend that all energy investors need to be watching. Costs are a "silent killer" in the resource sector--slowly eroding profits and eventually leading to a collapse in valuations.
Successful E&Ps going forward will be the ones who proactively address this issue. Big firms like Apache have recently been selling down assets--with the company announcing yesterday it will shop its western Canadian assets for $374 million. Such a strategy of monetizing properties might be a good idea amid the current operating environment.
Oil-focused companies currently have a bit more leeway, with crude prices remaining high. But any pullback in prices--even 10% to 20%--could be a trigger for major financial crunches at numerous companies.
Something to bear in mind as we look for ways to profit from today's energy space.
Here's to adding up the costs,
By Dave Forest