Oil Stock Investors Batten Down The Hatches

Oil Stock Investors Batten Down The Hatches

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

  • Year-high inventories in Europe’s main hub
  • Supply-cut exempt Nigeria nearing the highest oil exports for 17 months
  • U.S. crude oil production (52% from shale in 2016) rising to 9.35 million barrels a day, close to Russia and Saudi levels, despite two consecutive weeks of falling inventories

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.

Source: Thomson Reuters and City Index

Key takeaways

  • One possible explanation emerges for why Repsol stock has outperformed its peer group: it has managed to reduce costs marginally whilst ramping up production at the second highest rate
  • World No.1 Exxon (NYSE:XOM) barely increased production in its last fiscal year, and an already hefty (for Exxon) circa 4% cost reduction looks hard to repeat
  • Shell's (LON:RDSb) BG buy added an exponential amount of barrels of oil equivalent production in one fell swoop, whilst costs were flat. A ‘fear discount’ is still weighing on its rating (P/E) after the giant acquisition. But investors may find it is a cheaper play for similar yield than its arch rival (Exxon) as oil price uncertainty continues

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Original post

Ken Odeluga

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