Energy investors are shifting their attention from U.S. refining stocks that added $20 billion in market value last year to oil producers promising record output in shale fields.
An S&P energy index of U.S. shale-oil explorers such as Pioneer Natural Resources Co. (PXD) has jumped about 28 percent, or nine times the gain achieved during the last three years combined. They’re riding the explosion of new wells and rail links to refineries that’s bolstering revenue after crude traded in New York touched a 27-month high in August.
The shale boom will propel the U.S. past Russia as the world’s top oil producer by 2015, the International Energy Agency said two days ago, bringing its estimate forward by two years. That’s pushed a group of refiners including Marathon Petroleum Corp. (MPC) out of the spotlight, after they topped the S&P 500 Energy Index last year with 80 percent average gains.
Oil explorers are tapping deeper layers of oil-soaked rock in shale formations, bringing them “a lot of success this year, even outside the rise in the oil price, in the form of increasing production,” Sam Margolin, an analyst at Cowen & Co. LLC, said in a telephone interview from New York.
Although swelling crude stocks from the flood of new production has cut the benchmark North American oil price by about 17 percent since its 2013 peak in late August, an S&P index of U.S. shale producers has gained 5 percent in the same period, keeping on track for the largest annual increase since 2009.
Pioneer forecasts oil output will surge 14 percent this year as it turns the tap on new wells in south and west Texas, even after selling all of its assets in Alaska.
Gushing output has been a “mixed blessing” for producers because it yields more crude they can sell while also undermining the prices they receive, said Kevin S. McCarthy, who manages $10.8 billion as chairman and chief executive officer of Kayne Anderson Energy Development Co. in Houston.
Profits in the oil patch will continue to be “very strong” because even with the recent drop in crude markets, prices are well above production costs in shale formations, McCarthy said.
Weakening oil prices in the last half of the year won’t provide much lift to refiners as they continue to produce gasoline, diesel and jet fuel faster than consumers can burn it, said Jorge Leis, head of Bain & Co.’s Americas oil and gas practice.
The top performers in the S&P energy index this year through Oct. 31 all are leading shale explorers: Pioneer, Chesapeake Energy Corp. and Hess Corp. expanded their combined market value by $33 billion during the period, seven times the rate of growth for the trio of refiners that led the index in 2012, according to data compiled by Bloomberg.
Last year’s top-performing U.S. refiners -- Marathon Petroleum, Tesoro Corp. (TSO) and Valero Energy Corp. -- reported a combined $1.59 billion profit decline for the third quarter compared with a year earlier as the costs of feedstock for their plants escalated, and prices for the fuels they produced dropped.
Retail gasoline and diesel prices at U.S. filling stations fell by 16 percent and 7.3 percent, respectively, since reaching their 2013 peaks on Feb. 25, according to Department of Energy figures. During that same period, the benchmark grade of U.S. crude, West Texas Intermediate, increased 1.6 percent, squeezing processing margins.
The impact has been felt most in the Midwest and Great Plains where refiners last year enjoyed access to lower-priced crude from nearby fields. Feedstock costs surged this year as pipeline expansions and new railcar fleets siphoned off local oil supplies to the Gulf Coast and Atlantic seaboard markets where they could fetch higher prices, said John Auers, senior vice president at Turner Mason & Co., a Dallas-based energy consulting firm.
Gulf coast refiners will benefit next year as crude prices fall in that region much as they did in the Midwest in previous years, Bill Day, a spokesman for Valero, said in a telephone interview Nov. 11. Valero rose 3.9 percent to $42.84 at the close today in New York. Marathon Petroleum gained 5 percent to $78.86, and Tesoro added 3.2 percent to $54.95.
The refiner’s curse has been the producer’s blessing. Higher crude prices have translated into multiplying returns for Pioneer, whose shares rose 92 percent during the first 10 months of this year. Chesapeake, based in Oklahoma City, gained 68 percent during that period after replacing its chief executive officer in June amid a shift to focus on crude production in its shale fields. Hess was the third-best performer with a 53 percent rise in shares.
Pioneer’s net income more than quadrupled to $91.1 million during the third quarter, the Irving, Texas-based company said in a Nov. 4 statement. Three wells in the Permian basin of west Texas and southeast New Mexico showed record results for that part of the formation, according to the statement.
Chesapeake (CHK) swung to a $156 million profit from a $2.1 billion loss a year earlier after boosting crude production by 22 percent, according to a Nov. 6 statement. Hess saw net income fall 25 percent in the third quarter because of operational issues in the Gulf of Mexico and in Libya that reduced production.
To contact the editor responsible for this story: Susan Warren at firstname.lastname@example.org