TurnkeyOil's  Instablog

1. Oil Prices and Corporate Earnings

 

This may sound counterintuitive but rising crude oil prices do not always translate to higher corporate earnings for oil and gas operators and oversupply does not always bring about falling prices. In 2009 for example, crude oil prices doubled between early Q1 and end Q4 but major oil and gas companies recorded steep decline in earnings (for some, as much as 70%); this doubling of prices was in spite of massive, global crude oil inventories — even floating and other storages were fully oil-laden.

According to a recent report by the energy research firm Evaluate Energy, the six largest IOCs by market capitalization to wit, BP (BP), Chevron (CVX), ConocoPhillips (COP), ExxonMobil (XOM), Royal Dutch Shell (RDS.A) and Total (TOT), have, in spite of massive capital expenditure “failed to materially expand either their production or their proved reserve base over the past decade”; acquisitions alone accounted for 28% of their ten-year reserves replacement. The implication then, if these conditions persist, is that rising discovery costs per barrel of oil — which would probably become even steeper given the increasing geological complexities of available acreages — may test the profitability of these companies in due course, even in spite of rising oil prices.

2. Policies of State – royalties and windfall profits taxes

 

Among major petroleum exporting countries, the steep royalty and tax rates on oil proceeds have been more than an emperor’s ransom to the operating IOCs. In addition to reserves constraints, these have brought them under comparative disadvantages with their state-controlled counterparts, National Oil Companies or NOCs, especially those that have re-organized and have become partially-listed. 

Read the entire article here: http://turnkeyoil.com/2011/04/06/crude-prices-increase-should-you-buy-oil/