It turns out, bigger isn’t always better. At least when it comes to energy stocks.
The prevailing idea used to be that, to be successful, an energy stock had to control every part of the cycle — from the wellhead to the gas tank. Becoming integrated was the key to dominance and shareholder returns.
Large energy firms bolted on acreage, pipelines, gathering systems, refineries and retail outlets to beef up across the various “streams” of the energy world … all in an effort to maximize profits and reduce costs.
Well, with smaller independents like Range Resources (RRC) eating the large integrated firms’ lunch, the name of game these days is “little.” Spinoffs and asset sales are now the norm for the former giants, and that’s helping in the returns department as several leaner and meaner energy stocks are finally producing stellar results once again.
So who exactly is getting the picture these days? Here are five energy stocks that are trimming down the right way:
Perhaps no giant has been better at getting smaller than ConocoPhillips (COP). That’s impressive because former CEO James Mulva was credited with kicking off the integrated movement back in the late 1990s. The firm cast off its refining operations — as Phillips 66 (PSX) — and has once again made energy production its focus.
The bulk of that focus has been shale, shale and more shale.
Conoco has basically become a U.S.-focused producer by shedding billions of dollars in non-core assets. That has included liquefied natural gas facilities in Australia, Canadian oil sands holdings and assets in Indonesia and Nigeria … all while plowing big bucks back into U.S. fields such as the Eagle Ford and Bakken.
That’s certainly helped COP on the production front. Conoco’s combined production for the Eagle Ford, Bakken and Permian Basin jumped 47% year-over-year in the second quarter. All in all, the former integrated giant saw adjusted production of 1.51 million barrels of oil equivalent per day vs. 1.489 million BOE a year ago.
Shareholders have been happy as well — COP shares are up about 17% this year to edge out the market, and that doesn’t factor in its big 4% yield.
Sometimes, shareholder activism can produce real change at a company. A perfect example of that has been Hess (HES).
After a recent tussle with activist hedge fund Elliott Management — who accused the board of “poor oversight” and being responsible for more than a “decade of failures” — Hess has unveiled a series of transitional events to reshape the integrated firm into a pure E&P operator.
So far, the firm has sold more than $3 billion in assets — including Russian holdings, offshore fields in the North Sea and Eagle Ford assets in Texas. Still on the chopping block are the company’s downstream businesses and interests, consisting of terminal, retail and trading operations. The 19 terminals along the East Coast plus the two terminals in the Caribbean currently store about 52 million barrels of crude oil and are estimated to be worth around $1 billion.
Investors certainly like Hess’ moves … not to mention its 43% YTD climb and a dividend that will jump 150% to 25 cents quarterly by year’s end.
While it’s technically not an integrated giant, Apache (APA) is no slouch independent producer. Still, it has become something of a bloated giant. To that end, management at the company has begun the task of slimming down its waist line. APA has now raised around $7 billion via asset sales this year including about $3.5 billion worth of shallow, underperforming Gulf of Mexico assets.
Yet its latest sale could be the most transformational.
Apache recently agreed to sell a 33% interest in its Egyptian assets to Chinese firm Sinopec (SNP) for $3.1 billion. Egypt currently accounts for roughly 20% of Apache’s current production as well as 25% of its cash flows. Given the nation’s recent “issues” and political strife, it also was the main reason why shares have been falling behind its other rivals.
Yet, with the main obstacle to its success now perhaps behind it, Apache can focus on more stable operations in North America. APA already gets about 55% of its daily production from the safety of U.S. and Canada’s shores.
Once investors learned that Apache was putting the focus back on North America, shares popped 7.5%.
Like Conoco, Marathon Oil (MRO) took the initial steps of becoming leaner by splitting its refining operations away from its E&P efforts. However, that isn’t enough for the Houston-based oil producer; Marathon has continued to shed non-core and politically unstable assets.
In the three-year period ending this year, Marathon expects to raise between $1.5 billion and $3 billion from asset sales, and recently agreed to sell its 10% working interest in offshore Angola to Sinopec for $1.5 billion. The sale marks a decided shift in MRO’s strategy, as it actually has been quite successful in Africa.
That shift — as you might guess — puts Marathon very much back into the U.S. and its vast shale resources.
With the firm looking at dumping its Canadian tar sands assets, Marathon will have adjusted its asset mix to primarily focus on drilling in onshore U.S. shale plays. MRO controls 200,000 acres in the Eagle Ford, 390,000 acres in the Bakken as well as 220,000 acres across Oklahoma’s vast shale basins.
That shale production will help MRO pay down debt, buy back shares and get more aggressive with its dividend.
If there ever was a firm that needed to “slim down” it would be Chesapeake Energy (CHK). As former CEO Aubrey McClendon built Chesapeake into a natural gas giant, it became more of a bloated fat cat rather than a sleek fracking machine.
Not to mention all the debt Chesapeake took on.
The bloat has included stakes in more than 100 real estate ventures — including shopping malls, office building and homes — a crude oil trucking company and stakes in smaller “penny stock” exploration firms like Gastar Exploration (GST).
Since McClendon’s ouster, CHK has undergone a massive transformation to get rid of that excess and focus on getting back to the business of drilling for natural gas. And Chesapeake should get there — the firm has prime acreage in almost every shale play in the U.S. That fact could finally make CHK a buy as it returns to its former glory.
Investors certainly think so, too — shares are up a staggering 57% year-to-date.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.