Upstream energy companies
In this series, we’ll look at four American upstream energy companies’ production trends over the last few quarters. We’ll also try to analyze these companies’ debt burden given that energy prices have dropped so low and examine whether the companies are generating enough cash flows to sustain their capital expenditure plans. These four companies are:
- Concho Resources (CXO)
- Pioneer Natural Resources (PXD)
- Marathon Oil (MRO)
- Continental Resources (CLR)
Upstream companies engage in the exploration and production (or E&P) of crude oil and natural gas.
As noted in the chart above, Pioneer Natural Resources has been the outperformer in our group since September 4, 2012, returning 23%. During the same period, Concho Resources returned 21%.
The Energy Select Sector SPDR ETF (XLE) returned a negative 2% over the past three years. XLE tracks an index of 40 listed energy companies. Continental Resources and Marathon Oil have not only underperformed their smaller sized peers, PXD and CXO, they also posted returns lower than the industry ETF. CXO’s and MRO’s three-year returns have been negative 15% and 31%, respectively. Together, Marathon Oil and Pioneer Natural Resources make up 4.16% of the Energy Select Sector SPDR ETF (XLE).
Note that the upstream companies in our group operate primarily in the resource shales. However, their areas of operations vary. While some operators like Concho Resources have concentrated on limited geographic regions or shales, others like Marathon Oil have a much wider asset and production base. Also note that while these companies’ production tilts more towards crude oil, the crude oil-natural gas mix affects these companies’ revenues and operating performance.
Despite low energy price levels in recent times, most of the producers have not yet cut down production. This is because:
- Falling production costs made continued operations viable even at low energy prices.
- Many upstream companies have huge debts. Any sharp decline in production can seriously impair their debt repayment capacity.
We begin our analysis with Concho Resources in the following part.