TO: Patricia Bennett, Supervising Principal
FROM: Connor Sims, Associate
SUBJECT: Oil Drilling & Gas Extraction Industry in the US Analysis (21111)
This report presents information regarding the industry, the primary operator of oil and gas field properties. The industry fuels its key buyers, the Natural Gas Distribution (22121) and the Petroleum Refining (32411) industries, with crude oil and natural gas. The industry continuously battles a shortage of available oil. In addition, many major oil fields have been in use for decades, slowly waning. Currently, the industry grosses among the most profitable in the US despite these and similar obstacles. The benefits of investing here potentially outweigh concerning risks. Because of the esteemed value of the industry’s products, consistent demand for its products, and its positive near-future outlook, diversification into this industry may produce rewarding profitability in the short-term.
High Product Value
Crude Oil Prices
The key economic driver for the Oil Drilling & Gas Extraction Industry, crude oil prices, determines much of its profitability according to supply and demand. Price trends in West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, display the growth of its value in the past 3 years and past decade. An average barrel of crude oil grew from $26.18 in 2002 to $61.95 in 2009, $79.48 in 2010, and $94.87 in 2011 (Airlines, 2012). JP Morgan analysts project average annual prices above $99 in upcoming years (Sethuraman, 2012). Such upward growth points to lucrative profits.
Natural Gas Outlook
Natural gas production accounts for 41.6% of industry revenue in 2012. Prices in natural gas reached a 10-year low in April this year, but have erupted by more than 70% since (Hargreaves, 2012). Natural gas has seen an abundantly large output due to recent discoveries of natural gas in the Appalachian Basin; this large supply has kept prices relatively low recently, leaving opportunity for even higher profitability in future years.
Fueling US Industries
The Oil Drilling & Gas Extraction Industry is the sole supply industry for its two demand industries, Petroleum Refining and Natural Gas Distribution (Hersch). The US internally consumes 19,150,000 barrels of oil per day, doubling the world’s second largest consumer, China (Index, 2012). IBIS World describes the industry’s demand industries as “mature,” assuring the stable demand for our industry’s products (Hersch).
Rising Exports, Foreign Buyers
Current international relations appear conducive to this industry’s profitability. In 2011, for the first time since 1949, the US exported more refined oil than it imported (Winters, 2012); this evidences the success between the supply industry and its demand industries detailed above. Additionally, oil exports to China will surge as it industrializes quickly. China’s exponentially growing demand leads to worldwide price increases (Hersch). Any increases, particularly increase this substantial, raise the WTI average price per barrel, increasing profitability.
Positive Current Standing
Favorable Market Concentration
The four largest firms in the industry comprise of approximately 30.0% of total revenue (Hersch, 2012). Market share concentration is low, allowing firms of any size to portion the industry’s $345.9 billion revenue this year. The competitive aspect of entering this industry would not be a difficult obstacle to overcome.
The Oil Drilling and Gas Extraction Industry reels in a significantly larger margin in comparison to related industries. 46% of all industry revenue goes to profit, higher than the average for the entire mining sector, 39.2% (Hersch, 2012). In 2008, the industry returned the 7th highest profit margin among US industries (Hargreaves). Profit margins have increased in the past 5 years...