Sunday, January 07, 2007

Big Oil: All Hat, Not a Lot of Cattle.

Howard Simons of Bianco Research makes a point in the below video that bears repeating. Right now, the major public international oil companies are in an interesting position where they are producing huge amounts of oil every year, yet their reserve replacement ratios (what percentage of their reserves, or potential future production, they are able to replace each year) are declining. The main factor is the increasing oil nationalism that's occuring around the globe, which forces them to take smaller pieces (if any at all) of potential projects.

Last year Weeden & Co oil analyst Charles Maxwell appeared on Bob Brinker's Moneytalk radio show and in response to a caller's question, suggested that 5-10 years or so down the line ExxonMobil would split itself into a exploration and production operation and a royalty trust. The E&P would aggressively hunt for new sources of production, while the royalty trust would hold the legacy production assets and throw off high dividends as those assets depleted.

CNBC Video: Energy Breakdown.


"I would stay away from the producing side, but the service side, the drillers, the equipment, these firms are all gonna do fine. One of the things we have to remember about the producers, especially the international majors right now, is they are actually self-liquidating companies, they're not able to replace their reserves, and they're not able to acquire new reserves worldwide because of political considerations. But the service and equipment sectors can do that, so those are long term plays, and they're gonna do just fine."