Energy Stock Returns Disconnected From Oil Price Rise

The lack of consistent comprehensive measurement of breakevens and efficiency gains across upstream oil and gas company portfolios has led to a disconnect between investor returns and the oil price increase over the past year, consultancy Deloitte said in a report this week.

Although all upstream companies took actions to high-grade and transform their asset portfolios during the downturn, shareholders have not yet seen the benefits of these actions. The share prices of 73 percent of upstream companies across the world have failed to increase alongside the increase in the price of oil since January 2017, Deloitte said.

Despite the fact that crude oil prices increased by 25 percent between January 2017 and end-February 2018, and despite companies having achieved significant productivity gains in recent years, shareholder returns on average for upstream companies have still been negative, even for the companies focused on the Permian. Exploration and production companies in the Permian reported an average shareholder return of minus 14 percent in that period, compared to a 25-percent increase in oil prices, Deloitte’s analysis of the top 230 global upstream companies showed.

“According to our analysis of the top 230 global upstream companies, the portfolios (consisting of producing, under-development, and discovered projects) of 77 percent companies could still face challenges in sustaining current production levels, funding future growth, and maintaining shareholder payouts in a $55 per barrel oil price scenario over the next five years,” said Deloitte.

Between January 2017 and end-February 2018, global and U.S. energy indices underperformed oil prices by between 14 and 36 percent, especially when there was euphoria in capital markets worldwide.

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“In fact, the current stock price of 18 pure-play upstream companies, which have a combined market capitalization of more than $110 billion, is even below early 2016 levels when oil touched a 13-year low of $26/bbl,” Deloitte said.

“The most talked about ‘breakeven point’ published by producers has become highly incongruent, veiling the performance gap between premium assets and the overall portfolio of a company. Our study of top integrated oil companies (IOCs), pure-play exploration and production companies (E&Ps), and national oil companies (NOCs) reveals a breakeven gap of $19–33/bbl between their best assets and their overall portfolio,” according to Deloitte.

While investors in the integrated international majors have always wanted as high returns as possible and the supermajors have tried their best to keep them happy, now U.S. shale investors also demand returns, and production growth is no longer the leading theme—it’s shareholder returns.

By Tsvetana Paraskova for Oilprice.com

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