Ken Odeluga | Jun 23, 2017 18:48
This week’s energy world drama is another reminder that all things oil-related can be slippery
Earlier in the year, OPEC lynchpin Saudi Arabia let it be known that it wanted to see crude oil around $60 a barrel (bbl). Instead, oil has seen its biggest drop in the first half of any year since 1997, with Brent this week bottoming at a seven month low of $45.35. We all know what went wrong, but not even OPEC itself seems to know why. Twenty two straight weeks of higher and higher oil rig counts is a clear enough message that the cartel’s supply agreement isn’t working.
The main price tipping points
Big Oil falls hard
For investors in Big Oil, worries that were all but put to sleep earlier in the year have now been dusted off. There’s a bigger chance that stocks of most oil producers will fail to rise this year, after gaining in 2016. Of 18 US and European oil majors, only two, Marathon Petroleum (NYSE:MPC) and Spain’s Repsol (MC:REP) are trading higher so far this year. They’re up a meagre 4% and 2% respectively and have been sliding since late May. (Marathon’s parent company Marathon Oil (NYSE:MRO) is down 33% year-to-date).
More than ever, cost efficiency and oil production growth will be in the spotlight. Investors will tend to stick with companies that slash the most costs and pump the most oil to maximise cash flow as prices relapse. The table below shows production growth and revenue costs for western European and US oil ‘supermajors’, together with forward price:earnings ratios and forecast dividend yield.
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Written By: Ken Odeluga
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