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In what is likely to be one of the more interesting stories in 2009, the Financial Times on Wednesday discussed the impact that the falling price of oil will likely have on some of the world’s largest multinational oil companies.
Despite having record breaking profits in 2008, 2009 looks to be a different story altogether as the decline in oil from $150 to $40 could lead to hard choices for oil companies. Particularly on whether or not to continue with their current level of capital expenditures, share buybacks and dividends or to reduce these expenditures to reflect their current cashflows and the price of oil. Below you will find a fascinating graphic from the Financial Times that breaks out the cashflows of six of the worlds largest oil companies and the impact that the fall in the price of oil will likely have on them.
Click to enlarge
The negative cashflows that will likely be achieved by BP, ConocoPhillips (COP), Shell (RDS.A) and Eni (E) at $35 oil will force these companies to either reduce their capital expenditures and shareholder payments or to borrow in order to continue with their current expenditure policies. While these companies have certainly built near fortress balance sheets, no management team enjoys shelling out more cash than what is coming in on unprofitable capital expenditures and through the return of capital to shareholders.
In addition to the cashflows of the world’s largest oil companies being impacted by low oil prices, their balance sheets are as well as the firms will likely have to take dramatic writedowns on assets that were purchased at premium valuations during 2008. A prime example of this occurring can be seen in ConocoPhillips' most recent quarterly report in which it took a $34 billion dollar writedown.
Unlike their smaller brethren, BP, ConocoPhillips, Exxon Mobil (XOM), Shell, Total (TOT) and Eni have held up fairly well given the recent swoon in the financial and commodity markets. This trend will likely not continue, as investors are likely to become increasingly skittish of these firms because of the ever increasing chance that they will be forced to take on substantial amounts of debt to maintain their current capital expenditures and shareholder return policies. Over the last year these six companies have performed as follows:
XOM: Down 2.8%
TOT: Down 25.3%
RDS: Down 26.4%
E: Down 28.0%
BP: Down 30.3%
COP: Down 38.3%
Of these six, it is clear that Exxon Mobil has significantly outperformed its fellow big oil peers. Despite having $31 billion in cash, the company’s quarterly earnings reports will likely be ugly going forward as the company’s free cashflow will undoubtedly come under significant pressure. At its current price the company’s earnings multiple is 2-3 times its smaller mid and small cap peers. Despite its ability to radically reshape the oil and gas industry with its strong balance sheet, the stock should not be held at these levels given the current price of oil.
The company's most recent quarterly report, and the ones that will come after it, will weigh heavily on the stock’s momentum investors, as they will become increasingly uncomfortable holding shares in a company with a deteriorating balance sheet and income statement.
There are many other smaller oil and gas stocks that I would rather own over Exxon that have already fallen significantly and are now trading at levels much more reflective of the current environment within the energy markets. Unless oil returns to $70+ dollars per barrel, Exxon Mobil will more than likely come under significant pressure going forward as the gap between its valuation and that of its fellow big oil peers begins to converge.
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This article has 29 comments:
It will likely continue to hold up because of its massive balance sheet and superior management. However, when oil prices begin to move up again, Exxon will likely just stay flat.
Better to buy a depressed company that can double when oil goes back up than Exxon. None of the oil majors are anywhere near bankrupcy. So buy a depressed one, collect 5%+ and wait for oil to go back up.
They will lose their windfall taxes at a time when they
need it the most.
Long live the curve!
Without further info., not sure I can put much into this analysis.
Without oil & natural gas, the whole world will collapse.
Tell me which building in the US is not hooked up with natural gas lines ?
Only a few, right ?
Summer time to heat a swimming pool it costs $15 - $20 per day.
Winter time it costs average $10 per day for cooking & heating.
If oil and gas price drop to so low, they just stop production.
They won't sell something at below cost.
Then the workers will go on Strike when not enough hours of work.
Remember years ago when gasoline prices were so low and suddenly
so many trouble or accidents happened at the refineries throught out the country ? America is addicted to oil. We won't survive without it.
> jack
Sure! Oil companies will milk the consumer for what ever amount they feel they can get away with before there is another outrage, and people simply cut back on their spending by driving less, etc. This is why it is so very important for us to find alternatives to oil....so that we can no longer be held ransom by the oil companies, who sadly enough, have no one's interest in mind, but their own, regardless of the general state of the economy.
And that is the exact mentality that we need so desperately to change. We need to find and implement alternatives to this liquid which is currently holding us all ransom.
It is due solely to the standard greed of privatized companies. And while I am by no means a socialist, this is indeed an excellent argument in support of nationalizing essential services, such as gas, oil, healthcare, etc. Someone really does need to control them in order to protect average consumers.
Naturally, one must always assess the factual basis and background of any advice or opinion as best as one can.
Recent articles about Devon Energy is a case in point, and after watching the price decline, few will argue with the warnings now, with or without the article's effects as a contributory factor.
Some have suggested that it will take around $55 /BL to shore up the balance sheets of the oil companies on a forward basis. If so, rallies in the oil stocks should be treated with suspicion unless you think oil prices will reach at least that level in the next two or three quarters (as it very well could), and there's the rub, because it might not.
A good and useful article as any bit of solid info helps in some way, and it is always the individual investor's responsibility to supplement the info as necessary.
I would add that the problem for many oil companies goes well beyond development costs versus price of crude oil!
The real dilemma facing many of the oils is that they borrowed (and spent) a fortune on new lease acquisitions, buy-outs/mergers, new development projects and revivals of dormant ones. Many are now buried in debt they piled on with the assumption that oil below $100/Bbl was a thing of the past!
Be careful out there, as this sector is a virtual minefield!
On Feb 07 09:46 AM SeekingTruth wrote:
> I appreciate it when anyone with good knowledge can help me understand
> the flaws, threats, and weaknesses of ANY investment , as well as
> the opportunities, of course..
>
> Naturally, one must always assess the factual basis and background
> of any advice or opinion as best as one can.
>
> Recent articles about Devon Energy is a case in point, and after
> watching the price decline, few will argue with the warnings now,
> with or without the article's effects as a contributory factor.
>
>
> Some have suggested that it will take around $55 /BL to shore up
> the balance sheets of the oil companies on a forward basis. If so,
> rallies in the oil stocks should be treated with suspicion unless
> you think oil prices will reach at least that level in the next two
> or three quarters (as it very well could), and there's the rub, because
> it might not.
>
> A good and useful article as any bit of solid info helps in some
> way, and it is always the individual investor's responsibility to
> supplement the info as necessary.
$40/barrel is overdone, but demand in the next three quarters is questionable.
On Feb 07 08:18 AM Ferdinand E. Banks wrote:
> Hmm, it looks to me as if someone is going to have to convince those
> countries in the Middle East to privatize their oil operations so
> that we can buy shares/stocks in them. If Exxon and Chevron can
> make record profits in the last quarter of 2008, think of how profitable
> investments will be in that part of the world (where the cost of
> crude is only a couple of dollars a barrel) when they increase their
> refining activities with X percent - something that, incidentally,
> they are almost certain to do.
Mark this post. It is not just about demand any more. Oil and all commodities will make new highs in 2009-2010 against all fiat currencies.
Got Gold , Got Silver, Got USO, Got DIG, Got SLX, Got DBA, Got Rogers !?