Big Oil, we have a problem: Diminishing returns hit profit

A gas flare is seen at an oil well site outside Williston, North Dakota.
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The fact that the Federal Reserve did not appear to completely rule out tapering in December has been weighing on stocks since the announcement of no tapering yesterday. Sentiment is very much against the October rally (the S&P 500 is up 4.8 percent, its best month since July), which of course is the biggest asset for bulls.

It's fashionable to declare that stocks are "overbought" (technically true), but proclaiming they are "tired" or "floundering" has now become a cliche, about as useful as griping out the low volume, a complaint that is now two years old.


1) Big oil has problems: it's not just tough refining margins, but lower oil production that plagues them:

a) ExxonMobil, the worl'd's largest oil company, reported the same problem they have had for a while: Downstream (refining) earnings below expectations, but this quarter even upstream (oil production) earnings were below production. The biggest problem is that for the big global oil companies the cost of replacing the existing oil supply gets tougher every year.

You can see this in the annual oil production figures: 883,000 barrels in 2010, 737,000 in 2011, 702,000 in 2012, and will likely be lower again in 2013.

Overall earnings for the quarter of $1.79 are well below the third quarter of last year ($2.09) and 2011 ($2.13).

What can Exxon do? The stock is only up 2 percent this year. They can join their other big oil brethren and keep buying back shares...another $3 billion in Q4. They can also keep the dividend up, which currently has a 2.8 percent yield.

b) Conoco Phillips, the third largest U.S. oil company, did well on its earnings. Still, production has also been steadily declining for years:

Conoco annual oil production

2009 522,000

2010 451,000

2011 314,000

2012 261,000

Now, that is a drop! Conoco, of course, is keeping the dividend up, now 3.8 percent yield.

c) Royal Dutch Shell reported profits down about 30 percent as refining margins remained poor; explorations and production expenses were also higher. The CEO said "we are facing headwinds from weak industry refining margins, and the security situation in Nigeria" is also an issue for them.

What to do? They are buying back shares ($4 billion so far in 2013 alone), and paying out dividends (more than $11 billion in the last 12 months--dividend has gone from $0.43 to $0.45).

So where is the growth? It's in the fracking plays like Pioneer Natural Resources, which is big in the Permian basin, and the exploration and production (E&P) companies like EOG, and the big players in fracking services like Halliburtion , Baker Hughes, and Schlumberger.

This Year

PXD 95%

HAL 53%

EOG 49%

BHI 42%

SLB 35%

IPO Thursday

2) IPOs today include:

a) (WUBA), largest online marketplace serving local merchants and consumers in China, priced 11 million shares at $17 each, above the $15 to $16 range. WUBA upped its price talk on Oct. 28 from $13 to $15.

b) Private mortgage insurance Essent Group (ESNT) priced 19.7 million shares at $17 apiece, above the $13.50 to $15.50 range.

c) Marcus & Millichap (MMI), a national brokerage firm specializing in commercial real estate investment sale priced six million shares at $12 each, below the $14 to $16 talk.

3) Separately, Avon Products is down big on a miss on top and bottom line, but North American revenues were particularly weak at $328.6 million, well below expectations of a roughly $389 million topline. Overall sales declined one percent in constant dollar terms. Prices were up 6 percent, but volume was down 7 percent. Sheri McCoy has been there a year and a half.

By CNBC's Bob Pisani