Big Oil showed in its latest earnings that it has adapted to the lower-for-longer oil prices and is now making nearly as much profit as it did when oil prices were $100 a barrel.
So, is this the golden age of big oil? Goldman Sachs thinks so.
If it is, stock prices aren’t showing it.
Shares of the world’s largest non-state oil companies have lagged both the recent oil price increases and the general equity market trends—a sign that investors are yet to believe that Big Oil is still a worthy investment case amid the peak oil demand and EV boom narrative.
But Goldman Sachs believes that we are at the beginning of a ‘new golden age’ for the seven biggest oil companies -- ExxonMobil, Chevron, Shell, BP, Total, Eni, and Statoil.
The ‘Seven Sisters’ of Big Oil today, as Goldman dubs them, are set to increase their attraction for investors. Why? Because they’re in a sweet spot that will see them rake in the largest cash flow growth in two decades amid rising oil prices and low operating costs.
“We see this as the start of a new golden age for Big Oil’s reborn Seven Sisters,” Goldman analysts said in a report, adding that it is “also a favorable environment for returns in the commodity.”
The oil price crash has resulted in a slump in share prices, cutting their weight in the equity indexes to 5 percent—or less than half of their usual weighting. But patience comes to those who wait… Related: Permian Drillers Prepare For Double-Digit Cost Jump
Big Oil is now set to reap the rewards of the cost cuts and bounce back from that 5-percent weighting which is the lowest in 50 years, according to Goldman.
Just before the latest downturn, the 2011-2013 period saw “the largest number of project sanctions in the history of the oil and gas industry,” Goldman said.
“While those investments are likely to yield low through-cycle returns, all these projects are now coming into production, releasing unproductive capital and providing the industry with the strongest production, cash flow growth in two decades,” the investment bank noted.
Contrary to many investors’ belief that the best times for the biggest oil companies are when oil prices are very high, Goldman argues that the lavish spending at $100 oil eats into companies’ returns because of inefficiencies and cost inflation.
After the 2014 oil price crash, the industry entered a period of contraction in which many smaller companies didn’t survive, while international oil majors slashed spending, cut jobs, and repositioned portfolios to make profits at halved oil prices.
We’re now entering the ‘restraint’ phase of the cycle, and Big Oil stands out among others in taking advantage of the lower cost to extract oil—these costs have yet to catch up with the rise in oil prices lately.
This ‘restraint’ phase is “defined by backwardation, cost deflation, and consolidation--when a high-risk premium on long-term oil prices restrains investment and creates high barriers to entry,” Goldman’s Michele Della Vigna said in the report, as carried by Barron’s.
Goldman Sachs started expressing bullish views on Oil Majors as early as in September 2017, saying that simplification, standardization, and deflation were helping them to generate more cash at $50 oil than at oil prices at $100.
Then, at the end of last year, Goldman’s Della Vigna said that Big Oil was set to witness its best year in decades in 2018.
The investment cycle at $100 oil price “looked like a great time for the oil sector, but it was a horrendous time for Big Oil as effectively everybody ate their lunch,” Della Vigna told Bloomberg in mid-December.
Indeed, oil majors entered 2018 reporting much higher profits for Q4 and 2017, increased cash flows, called the end of the scrip dividends, some (Total, Statoil, Eni) said they would raise dividends, and some (Shell, BP) said they would resume share buybacks.
“Creating more value for shareholders” was a phrase too often heard at conference calls, but investors have not been too convinced, and the stocks’ performance has been underwhelming. Related: Oil Rig Competition Flares Up Amid Permian Boom
Despite production growth and strong financial performance, the Oil Majors have so far failed to win investors back, Wood Mackenzie’sChairman and Chief Analyst Simon Flowers wrote in late February.
“And there’s the rub. Regardless of the progress made, the sector’s correlation with oil prices tends to swamp all other factors,” Flowers said.
“It may be that an investor bias against oil stocks won’t change until a sustained price recovery is in sight,” WoodMac’s chairman said, arguing that Big Oil should continue doing what it has been doing in the lower-for-longer oil price world because it’s the right thing to do.
“Investors will gradually wake up to it,” Flowers says.
Analysts concur that Big Oil has turned the page of production and profit performance. We’re now waiting to see if investors will resume buying the “shareholder value” and “world-class investment case” selling points the international oil majors have been feeding them.
By Tsvetana Paraskova for Oilprice.com
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