The Commodity Investor Q&A
With Matt Badiali
July 23, 2008
Q: Are the major oil companies growing their reserves like they used to? I've read that they aren't. – T.N.
A: Some are and some aren't – and that's vital information for anyone interested in investing in oil.
Reserves are the lifeblood of an oil company. An oil company makes money by selling off its reserves. How efficiently a company replaces its reserves tells you nearly all you need to know about the company's future.
As large oil discoveries get harder and harder to find, oil companies are having trouble growing their reserves like they used to. Resource nationalization is also hurting Big Oil.
Think of an oil company like a dairy. An oil company that doesn't replace its reserves is like a dairy that sells 50 gallons of milk every day, but only gets 40 gallons out of its cows. Eventually it will go out of business.
That's a bit of an oversimplification, because there are many ways to look at reserve replacement. For example, you could look at the one-year change in reserves.
These five major oil companies saw reserves fall the most last year (all my data comes from Bloomberg):
Company |
Change in Reserves
(2006 to 2007) |
Chevron |
-9% |
Shell |
-8% |
ConocoPhillips |
-6% |
ExxonMobil |
-4% |
Marathon Oil |
-4% |
|
But one year's worth of data doesn't give us the complete picture. I think you get a much better perspective over a longer term. Here's a table of the worst reserve replacement over the past five years:
Company |
Change in Reserves
(2003 to 2007) |
Shell |
-17% |
Chevron |
-9% |
Eni |
-9% |
British Petroleum |
-2% |
ExxonMobil |
3% |
|
If you combine those data, you get a different view. Shell and Chevron are both having trouble replacing their reserves. That's not good... but it's not the entire picture.
The third factor we need to consider is, how much of the companies' reserves are in production? Let's go back to that dairy idea. A company that sells 30 gallons of milk a day will last a lot longer than one that sells 50 gallons a day.
You can think of oil reserves the same way. Chevron only tapped 64% of its reserves. In this case, Chevron looks like it's in better long-term shape.
According to those three pieces of information, here are the top five major oil companies right now:
Company |
Five-Year Replacement |
One-Year Replacement |
% Reserves Developed |
Statoil Hydro |
46% |
43% |
72% |
ExxonMobil |
3% |
-4% |
61% |
BP |
-2% |
1% |
55% |
Eni |
-9% |
4% |
58% |
Chevron |
-9% |
-9% |
64% |
|
So the ultimate answer to the question is no, the majors aren't doing a good job replacing the reserves they produce. As you can see, the second-best company, ExxonMobil, has just 3% more reserves today than it did in 2003.
This situation is indicative of what's happening all over the world: Most of the cheap oil has been pumped and burned... and it's getting harder to find more.
This reserve replacement data is great for screening companies... But before you go long (or short) these stocks, you need to dig deeper.
Good investing,
Matt Badiali
Editor's Note: Let me know if you have any questions about natural resource investing... I answer readers every Wednesday in Growth Stock Wire.
