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.
Write to Daniel Gilbert at daniel.gilbert@wsj.com
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