US stocks are setting all-time highs, crude is as costly as it’s been in many moons and there’s general belief that the worst is over for Europe even as the Chinese economy coasts to its much hoped for “soft landing.”

And yet obituary notices arrive on a near daily basis for Big Oil, which just can’t seem to catch a break.

The Economist questions their viability in a story headlined “Supermajord?mmerung,” in the issue with the tired T-Rex on the cover illustrating oil’s lot as “Yesterday’s Fuel.” The Financial Times is asking analysts whether Big Oil suffers from a “busted business model.”

And good old Associated Press joins the pity party held for the industry in the wake of recent disappointing results. “Profit and production at the world’s largest oil companies are slumping badly,” it warns.

Second-quarter earnings were, indeed, nothing to crow about. ExxonMobil’s (NYSE: XOM) fell nearly 18 percent short of the per-share consensus as production dropped 2 percent year-over-year. The colossus cut its share buyback from $5 billion per quarter the last two years and $4 billion in the latest period down to a $3 billion target for the third quarter.

Conservative Portfolio holding Chevron (NYSE: CVX) missed by 7 percent on the bottom line and its output was also down 2 percent from a year ago. At least Chevron didn’t cut its share buyback ambitions. But, as with Exxon Mobil, it’s paying dividends and buying shares largely with borrowed money these days, with cash flow from operations siphoned off by the mounting capital spending as these behemoths try to prove they’re not done growing.

As my colleague Robert Rapier explained this week, the short-term cause of the weak numbers was the shrinking spread between the international oil prices driving upstream revenue and surging domestic crude prices that eroded downstream margins.

But there are longer-term worries as well. As the Economist and many others before it have noted, much of the global oil resource base has increasingly fallen under the control of national oil companies that have become increasingly technologically sophisticated and noticeably less willing to share their bounty with foreign capital.

That’s pushed Big Oil into ever-costlier deep offshore drilling and into even costlier projects to extract natural gas and liquefy it for export in expensive places like the Arctic and Papua New Guinea. And of course the sheer scale of these corporations makes it extremely hard (read: costly) to move the production needle, hence the mounting spending to stem the production declines and replace the depleted reserves.

Some perspective is probably in order here: ExxonMobil is less than a month removed from trading within a percentage point of its 2008 record high. Chevron shares are up 20 percent in nine months.

Still, the biggest oil stocks have badly underperformed this bull market as a whole as well as the smaller drillers (like our favorites EOG Resources (NYSE: EOG) and Cabot Oil & Gas (NYSE: COG). The latter managed to scoop up the sweet spots in the choicest shale basins on the cheap and are still reaping the benefits of that foresight. Meanwhile, ExxonMobil badly overpaid for XTO Energy in 2010 shortly before natural gas prices crashed, and like its biggest rivals has been slow to cotton on to shale’s advantages.

No Contest

One frequently proposed solution is for the oil giants to start shrinking. This has some merit. Exxon and Chevron would be well advised to consider a refining spin-off given the relatively high earnings multiples the refining industry still commands, amid a refinery building boom in the Far East, the Middle East and South America.

And some of the in-house oil services operations might arguably command higher earnings multiples and win more outside contracts as standalones.

It would be harder for Big Oil to shrink its way into production growth. But Occidental Petroleum (NYSE: OXY) may be about to suggest the first move by divesting some of its international operations, and step two might involve opportunistically buying some faster-growing domestic producers, ideally with better timing than the deal for XTO.

Also, it’s important to recognize that the national oil company model that has so constrained the oil majors is itself broken. With exceptions like Saudi Aramco, nationalization has been disastrous for production in Venezuela, Mexico and Iran. (Sanctions on Iran, of course, have hurt its output even more.)

Mexico is now reversing decades of hostility to Big Oil by inviting foreign producers to invest in its slipping production, albeit on terms that may not be attractive enough. At some unforeseeable point in the future Venezuela and even Iran might follow suit. And overseas shale deposits offer another potential growth avenue, as suggested by Chevron’s recent deal with Argentina’s YPF.

In the meantime, costs are likely to keep climbing and inhibiting shareholder returns. We are comfortable with Chevron here just shy of its buy below target, and confident that purchases here will be well rewarded in the long run. But for investors who care about the next six months the stock might be a hold rather than a buy, and it will certainly remain vulnerable to any pullback in Brent crude so long as growth remains this lackluster.

We’re going to be less patient with European integrated oil plays Total (NYSE: TOT) and Eni (NYSE: E), taking advantage of the recent rally of the stocks to sell them from our portfolio. The pair suffers from most of the disadvantages of the US-based majors and several specific to Europe, namely shrinking domestic demand and overreliance on production from unstable regions like North and West Africa.

Any money freed up would be well spent on fast climbers EOG and Cabot, which look well placed to reward shareholders with cash flow from operations rather than debt issuance in the coming years. Big Oil used to be the ultimate conservative investment. But running up the debt as output declines doesn’t sound conservative.