The coming margin crunch
In particular, the quest for more production has pushed energy companies outside their traditional comfort zone, with exploration now centering on high-cost, high-reward unconventional areas like offshore ultra-deepwater fields, Canada’s oil sands, and the lucrative shale plays that have popped up around the world. All of these methods allow oil companies to claim gains on their reserves, but actually producing oil and gas from them involves much greater amounts of investment and requires energy prices to remain higher in order to be profitable.
Again, small companies have an easier job in building up assets, as they can move the needle with pure plays on lucrative areas. The long-term challenge that big oil companies face in achieving the same success poses a greater risk, and that’s a big part of why oil stocks have suffered lately.
Will oil stocks become leaders again?
With production being such a limiting factor for oil companies, you can expect energy prices to be the primary factor in determining profits. A sustained move for oil above $100 and a continuing recovery in natural gas prices could push oil stocks higher, but with higher supplies of energy products and continuing new discoveries, such a move looks unlikely in the short run.
The article Oil Stocks Haven’t Done Investors Any Favors in 2013 originally appeared on Fool.com is written by Dan Caplinger.
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