The Shale Revolution Did Not Pay Investors Well
We have all heard of the “shale revolution”. It has been touted as the energy panacea of our time. Given the extreme hype, one would expect that such enthusiasm would translate into above average share performance for shale operators. This has not been the case. Share performance has actually been quite mediocre and in some cases just downright poor.
The shale revolution started with shale gas. The Marcellus shale which spans Pennsylvania, parts of NY, West Virginia and Ohio has probably received the greatest amount of attention since the State of New York had a drilling moratorium for years which was recently replaced in favor of an outright ban on the controversial technique used to unlock shale reserves called hydrofracture stimulation or more commonly referred to as “fracking”. Looking at the top producers in the Marcellus, one would expect that these companies would have enjoyed returns on their shares which were commensurate with their expectation of future growth potential for their product. Interestingly, this has not occurred.
Five of the top producers in the Marcellus are Exco Resources, Range Resources, Chesapeake Energy, Anadarko and EOG, the former Enron Oil and Gas. Of these five companies, EOG was the only one which had reasonable returns over the past five years. EOG shares rose approximately 85% during that time right in line with the S&P 500 index. So nothing earth shattering here. EOG’s peers, however, had significantly weaker returns for shareholders. The next best performance was from Anadarko with a mere 18% over five years followed by Range with -1%, Chesapeake with -31% and Exco with a dismal -89%. And all during the height of the shale gas revolution.
In 2010, companies announced another shale possibility: extracting tight oil from the rock. Two plays emerged as the industry’s best examples of tight oil in the US: the Bakken in North Dakota and the Eagle Ford in south Texas. Returns for shareholders, however, did not much improve.
The star for share performance in the Bakken was Continental Resources which did indeed enjoy gains of about 120% over the past five years. So Continental outperformed the S&P 500 by a good margin. Its peers, however, significantly underperformed the index. Hess Corp. was next with a return of a mere 22%. Whiting Petroleum and StatOil each turned in negative share returns of -12% and -19% respectively. So only one of the top operators even came close to matching returns from the index which is fine if you were lucky enough to cherry pick that company.
The same was true in the Eagle Ford. There the top operators are EOG, Chesapeake, Anadarko, Marathon and BHP Billiton. EOG matched the index while the next best performer was Marathon at 53% plunging down to BHP at -33%. Further if one considers share performances over the most recent two year period rather than the longer five year time frame, the picture becomes even worse. And this while industry promised energy independence. Financial independence for shareholders, however, would have been another matter.
In short the shale revolution has not produced the types of returns that one would expect. In fact, returns have been marginal for most of the “best” companies. This would seem a curious irony. And yet, perhaps it is not so curious after all. Interesting dynamics are occurring in the energy markets and old paradigms are being challenged. Given the markets role as a leading indicator, the trend that is emerging appears to be that investors see more potential in clean energy companies within the entire energy sector than the tried and true oil and gas vehicles of old. Solar stocks in some cases have outperformed their oil and gas counterparts by multiples. And all during the “shale revolution”. During this same time, investment banks have made extraordinary statements to their most sophisticated clients about hydrocarbons becoming “extinct” within the next decade, a notion which was virtually unthinkable less than five years ago. And in another almost unbelievable example the automobile manufacturer, BMW, has announced that they will no longer make an internal combustion engine by 2022. That is only 7 years away. But all of this is another story.
Energy markets are changing and changing fast. Perhaps this is why the oil and gas industry felt so hard pressed to declare that shales were “revolutionary”. Too bad they did not provide a good return for investors.