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With Improving Crude Oil Prices and Better Shale Returns, Big Oil Is Back!

Aaron Levitt

We all know at this point that crude oil prices have risen over the last year or so.

After hitting decade lows back in 2016, a rising economy, increased demand, and a drop-in supply have sent average crude oil prices up more than 69% since its lows. For many energy stocks, this has been a godsend. A variety of independent energy producers from ConocoPhillips (NYSE:COP) to EOG Resources (NYSE:EOG) have seen profits and cash flows surge.

However, for Big Oil, the rise in prices hasn’t been as sweet.

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Believe or not, while profits at giants like Exxon (NYSE:XOM) and Chevron (NYSE:CVX), both big oil giants have trailed behind their slightly smaller rivals. And not just in share price appreciation. From production increases to margins, big oil seemed to be falling behind.

But that was then and this is now. After XOM’s and CVX’s latest results, big oil is back in business. For investors, it’s the sign we’ve been waiting for. The time to buy big oil could be now.

Big Oil and Its Big Slump

The idea is that big oil generally is insulated from price declines and real movements in commodities pricing. After all, both Exxon and Chevron feature vast operations covering down-, mid- and upstream assets. But the drop and “lower for longer” environment did hit big oil pretty bad.

Take Exxon for example. Already, the integrated energy stock was suffering on the production front and was having trouble filling its overall production with higher margined/valued crude oil.

Its so-called oil cut has drifting lower for years. Exxon started 2018 out seeing overall production decrease 6% year-over. Rival Chevron saw a similar lower profile from its production figures as well.

As we’ve said before, declining production in a rising price environment isn’t good for an energy stock. And big oil stocks cash flows and profits showed the strain.

Even worse is the fact that their size makes it difficult to jump-start production higher. You can’t just pump out an extra 1,000 barrels. It won’t really move the needle on their bottom lines. But with the “lower for longer” environment persisting, the giants were hesitant to spend some big bucks to start drilling. Exxon cut CAPEX to barebones, while Chevron only spent on sure things.

And while some investors found comfort in owning the duo for their dividends, even here there were some questions. Thanks to dwindling cash flows and high debts, analysts began wondering if CVX’s dividend was even safe. Both firms ended their long-term lucrative buyback programs to conserve cash.

As a result, both XOM and CVX trailed behind smaller rivals and sector measures like the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEARCA:XOP). In fact, XOM stock is basically sitting right where it was at the start of the year. Chevron is sitting at a 7% loss.

The Quarter That Saved Big Oil

The troubles for big oil could be ending, however. That is if their last reported quarter has anything to do with it. Yes, rising oil prices helped on their bottom lines, with both Exxon and Chevron reporting better than expected numbers. But what’s more impressive is that both seem to have figured out the production conundrum.

During their respective earnings releases, production at the pair increased. Chevron managed to record a company record of 2.9 million barrels per day. Exxon managed to see a slight jump to its production to around 3.8 million barrels per day.

Several new projects contributed to the gains, but the real winner was shale. Big oil was sort of late to the shale party, especially shale oil.

Remember, Exxon’s buyout of XTO was about natural gas, not so much Texas Tea. But now the duo is coming back with a vengeance. Both energy stocks have hit the hot-bed Permian Basin running.

During the quarter, CVX managed to see its production of shale oil in the Permian jump by over 150,000 barrels per day to reach 338,000 barrels. To put that growth into context, according to Chevron’s CFO Pat Yarrington that would be like “adding a midsize exploration-and-production company in the region.”

Not to outdone, Exxon also saw big gains in shale production in the region and currently has more than 38 rigs drilling in the Permian. Moreover, XOM is spending a big part of its $24 billion in new CAPEX on the Permian and other high-margined shales.

All of this is important as the Permian, as well as sister fields the Eagle Ford and Bakken up north, feature low costs, high efficiency and plenty of oil per well. Tapping these regions allows big oil to pull some big production gains for dirt cheap. The last quarter shows that they finally get it.

Time To Bet On Big Oil

So, what does this mean for investors? Big oil may finally be a big buy. The reason for smaller firms like EOG or Marathon’s (NYSE:MRO) better performance has been at the hands of shale.

Exxon and Chevron have spent much of their time focusing on huge LNG facilities, deepwater drilling and even forays into the Arctic. There’s nothing wrong with these as they are long-term bets. But they needed a boost in the short term to make investors happy and help solve the dwindling oil production problem today.

Well, they finally have that. Shale is finally starting to pay off big time for Exxon and Chevron.

For investors, that’s huge. What’s happening is you’re getting the “good” today as well as tomorrow. Low-cost shale will keep pumping out profits, while longer-term projects can be built out. The last quarter helped underscore this at big oil.

The bottom line is big oil could finally be a big buy. They seem to finally be getting that shale is the key to their midterm success.

As of this writing, Aaron Levitt did not hold a position in any stock listed.

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