You would think the U.S. energy sector is the place to be right now, with oil prices peaking over $100 a barrel. The truth however, is that the major integrated oil companies here in the U.S. are struggling with declining production and profits.
Costs are rising sharply for the majors including: Exxon, Chevron and Conoco Phillips. These companies are spending a record $369 billion on energy projects this year, up 11% from 2007.
Exploration and production (E&P) just ain’t what it used to be.
Big Oil Getting Squeezed by Foreign Nationals
The major producers face challenges to reverse declining production rates. These firms are struggling just to get access to new oil fields. Old energy industry stalwarts including Exxon, Texaco, Royal Dutch Shell and BP have been squeezed out by state-owned oil operators, who now control over 90% or the world’s oil resources.
The new industry giants are national oil companies including Russia’s Gazprom, Saudi Aramco in the Middle East, Brazil’s Petrobras, and Venezuela’s PDVSA. Collectively, these firms have either cut off access to promising new oil fields, or demand sky-high royalty payments from the major western oil companies.
The result is increased spending by the majors on offshore deep-sea drilling projects. That’s great news for the oil service stocks that perform this contract drilling work, but results in spiraling costs for the major producers.
US Energy Sector Profits at Risk
This is biting into profitablility big time. In fact, Exxon’s profits are expected to rise just 3% this year. Royal Dutch Shell’s earnings are forecast to fall 8%. And these Wall Street estimates are almost certainly too rosy to begin with, and may need to be slashed.
The Select Sector Energy ETF (XLE) – top heavy with old-line E&P firms like Exxon Mobile and Chevron – has fallen just 6.4% since October. Meanwhile the S&P 500 Index fell about 13%. I expect energy sector profits to be called into question amid slowing growth.
When this happens, the energy sector may soon catch up with the overall market’s decline on the downside.
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