Royal Dutch Shell plc (ADR) (RDS.A), Exxon Mobil Corporation (XOM): Why Bigger Isn’t Better in the Oil Patch

It was a tale of two companies during last week’s earnings deluge. On one side, bloated, Big Oil struggled to deliver results. On the other, nimble, mid-sized energy companies posted the growth investors crave. Welcome to the era of ‘Medium Oil.’

Poor results from the majors

What comes to your mind when you think of ‘Big Oil?’ Do you imagine smoky Texan conference rooms where suits divvy up the world oil reserves? How about overweight joggers running against a descending escalator?

Last week’s quarterly results from Big Oil – British Petroleum, Chevron, Royal Dutch Shell plc (ADR) (NYSE:RDS.A), and Exxon Mobil Corporation (NYSE:XOM) — only confirmed that these companies are running frantically just to stand still. Today, the four oil majors produce roughly 13.6 million barrels of oil equivalent per day. Five years ago, that figure was about 300,000 barrels higher.

Big Oil’s dilemma is that every time a barrel of crude is pumped out of the ground, it has to be replaced. To grow, these companies need to discover more than one barrel of oil for every one pumped. That’s becoming an increasingly difficult task in a world running out of easy, conventional reserves.

Take Exxon Mobil Corporation (NYSE:XOM) for example, which produced 1.6 billion barrels of oil equivalent last year. To replace these lost reserves and grow production, the company must find the equivalent to three ConocoPhillips every year. To accomplish this, Exxon Mobil Corporation (NYSE:XOM) has spent over $100 billion over the last five years to find and exploit new energy sources. Yet, in spite of this, the company’s production has been essentially flat since 2003.

Slow production growth combined with a failed bet on natural gas is putting the squeeze on Exxon Mobil Corporation (NYSE:XOM)’s cash flow and forcing the company to cut back on its share buyback program. Little wonder why shares fell 2% after the company reported results.

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has fared even worse with the company writing off $2.1 billion of its North American shale assets. This should suggest to investors during the company’s hasty rush into the shale bonanza, it picked up some inferior assets. The strain of growing output has proved so challenging, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has stopped providing production guidance for investors.