Companies focused on shale plays in the U.S. are seeing their cash return on equity inch up, unlike global oil and gas companies with portfolios that include shale plus conventional assets as well as interest in other sectors such as midstream and downstream.
The U.S. Energy Information Administration (EIA) recently released results from an analysis of 60 publicly-traded oil and gas companies. Results revealed that the cash return on equity (ROE)—defined as “a measure of the profit a company earns on money shareholders have invested”—for the shale-focused companies rose by 7 percentage points, going from 33% in 2012 to 40% through second-quarter 2014.
That is good news for the companies, which are much smaller than the major integrated oil companies. Such operations—which focused on gas then shifted to oil, given prices—can be expensive. Operators are constantly seeking ways to improve operations with hopes to keep costs down and make more money.
The reason for the smaller companies’ gain came down to two things: oil price and technology.
“The prices paid to producers for crude oils produced in various shale formations have risen relative to North Sea Brent prices since 2012, increasing the relative revenue of shale-focused companies. While some of the spreads have widened recently, the overall trend since 2012 through second-quarter 2014 has been narrowing spreads as rail and new pipeline infrastructure allow these crudes to reach more economically refining centers in the United States,” the EIA said in its report. “Absolute U.S. prices for West Texas Intermediate [WTI] Cushing, WTI Midland and Bakken have increased 7%, 4% and 9%, respectively, in the first half of 2014 compared to their 2012 average prices. This has also contributed to higher domestic upstream profitability.”
The EIA also pointed to technology advancements that have led to higher production volumes, which have in turn lowered the cost to produce a barrel of oil.
“Technology such as pad drilling can lower costs and decrease the time needed to drill a new well. This has not only increased production for the shale-focused companies but has contributed to a reduction in operating expenses as a share of revenue from 30% in 2012 to 18% through second-quarter 2014, according to the company financial statements,” the EIA said. “The volume of crude oil produced from various shale formations—in particular the Bakken, the Eagle Ford and the Permian—has increased dramatically. For the shale group of companies as a whole, total liquids production has increased 430,000 bbl/d.”
However, the story was not as positive for the global diversified vertically integrated companies. Their ROE dropped by two percentage points to 25% from 2012 through second-quarter 2014. Partially to blame for the drop was a lower price for the global crude oil benchmark, North Sea Brent crude oil, according to the EIA.
Moreover, “since this group of companies has more geographically diversified assets, some are exposed to geopolitical risks and were affected by unplanned crude oil supply disruptions,” the EIA said in its report. “In addition, while some companies within the group did have increased liquids production from North American assets, similar to the shale-focused companies, production declines in other parts of the world decreased total liquids production volumes by 414,000 bbl/d compared with 2012. Other less-profitable business segments, in particular downstream refining operations in Europe, Asia and Latin America, also reduced returns for some companies.”
Diversity in asset allocation may be one of the foundations for having a solid portfolio. But different times call for different methods of operation, and too much diversity may not be such a good thing—at least not now. Some companies have already figured this out and are streamlining operations by selling assets and becoming more focused.
Contact the author, Velda Addison, at email@example.com.