The energy sector always has some surprises for investors, and this trend will likely continue in 2012. Here's a look at some possible scenarios in the energy patch that might shock investors and the market next year. (To know more about oil and gas, read Oil And Gas Industry Primer.)
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Domestic Oil Breakout
Oil production in the United States peaked in 1970 and started a slow decline, and most pundits were convinced that this trend would continue ad infinitum. In 2010 and 2011, oil production flattened out and then began to rise slightly as the production engendered by the tens of billions of investment dollars started to overwhelm the natural decline of the United States oil production base.
Investors might find that 2012 is the year that United States oil production breaks out of this marginally up-sloping curve and starts to ascend at a faster rate. Although most experts insist that this will never occur, these are the same experts that made similar claims about domestic natural gas production a few years back. (Find out how to invest and protect your investments in this slippery sector. For more, see What Determines Oil Prices?)
The End of Big Oil?
In 2011, the energy sector saw some large reorganizations by major oil and gas companies that decided it was in the shareholders' best interests to split into separate upstream and downstream companies. The largest of these was Marathon Oil (NYSE:MRO), which started the year as an integrated oil and gas company and then separated its downstream businesses into Marathon Petroleum (NYSE:MPC).
ConocoPhillips (NYSE:COP) also decided to try it alone and announced the separation of its downstream assets into Phillips 66. This reorganization is expected to be completed in 2012.
So Who's Left to Break Up?
The 800-pound gorilla in the room is obviously Exxon Mobil (NYSE:XOM), the largest integrated oil company in the world with a $389 billion market capitalization. The scale of Exxon Mobil may be hard to fathom for some, but one way to put the company's size into context is by examining its production relative to other large operators in the industry.
Exxon Mobil reported third quarter 2011 production of 4.28 million barrels of oil equivalent (BOE) per day. This production level is almost twice the combined production of four of the largest United States-based independent exploration and production companies as seen below.
Apache (NYSE:APA) - 752,000 BOE per day.
Devon Energy (NYSE:DVN) - 661,000 BOE per day.
Anadarko Petroleum (NYSE:APC) - 660,000 BOE per day.
EOG Resources (NYSE:EOG) - 427,000 BOE per day.
Another potential separation target is Chevron (NYSE:CVX), which has a market capitalization of $198 billion and is the second-largest integrated oil company based in the United States.
2011 was an active year for the energy sector highlighted by the "discovery" of the Utica Shale by Chesapeake Energy (NYSE:CHK) and several other operators. Although many observers are confident that there are no new large oil and gas plays left to discover, the industry is likely to find another as companies scour the world looking for oil and gas.
European Shale Comes of Age
Investors cognizant of the numerous early-stage shale plays in Europe might liken the exploration process of these plays to watching paint dry. Yet 2012 might just be the year that one or more of these plays comes of age, powered by a successful appraisal well or rapid production growth. Poland is probably the leading candidate for European shale success. Outside of that continent, Argentina shale is likely to make headlines in 2012.
The Bottom Line
The energy sector is dynamic and usually characterized by unexpected events that impact carefully selected investments made here. This trend will probably continue in 2012, and investors should prepare for shock and awe next year. (For additional reading, check out A Guide To Investing In Oil Markets.)
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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.
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