The volatility in oil prices has some questioning the staying power of the oil majors, particularly in the wake of so much economic uncertainty around the globe. The demand for fossil fuels is sure to be impacted by a global economy that appears to be running on fumes, but for those looking beyond the near-term volatility of oil prices and the second-guessing of the global recovery, there are reasons to be optimistic.
The oil majors are in the enviable position of being in one of the globe’s great businesses. Demand for energy from fossil fuels has seen a twenty-fold increase over the past century. Over this period, two World Wars have been waged, regional instabilities have proved as perennial as the seasons, and the world has experienced at least seven recessions and one Great Depression -- yet demand for energy continues almost unabated. It is indeed a rare business that can have everything but the kitchen sink thrown at it and still keep chugging along just fine, thank you.
The stability of energy demand is reflected in the consistency of the industry's earnings power and consequent increase in share prices. Exxon Mobil (NYSE:XOM) alone has achieved a mind numbing 15% annual increase (including dividends) since the late ‘70s.
Of course, the industry’s staying power lies in this practically insatiable demand for energy by humans in all manner of endeavors. Couple that with the natural advantages the industry maintains through government patronage, tax credits, and decades of experience doing business and extracting fuels from some of the most unstable geographies on the planet, and you have an industry which plays on the big stage as a world-beating business. No other business can come close to garnering this stature, and no other business is remotely on the cusp of creating the barriers to entry and natural advantages that the big oil majors enjoy. It must be amusing for the executives at Exxon Mobil -- a company which quietly if even nonchalontly books $10 billion quarters (and that is profit, mind you) – to watch as Apple (NASDAQ:AAPL) briefly eclipses its market cap.
I can almost envision Exxon as the corpulent alpha male lion that lies supine after a large meal and yawns passively while a younger animal – in this case, Apple -- bags a gazelle, knowing full well that its position will remain unchallenged for the foreseeable future. The industry is too dominant, too entrenched to bat an eye, even in the wake of some of the smartest, most creative minds on the planet there is no getting around the natural advantages that an oil major can and does enjoy as the world’s best business. Big Oil can afford to be ponderous and deliberate whereby in most industries a slow or stolid nature would expose it to rapacious competition. This is why Apple stands not a chance of maintaining an edge in terms of world’s most valuable company -- the industry in which it competes is just flat out too competitive.
At its core, Big Oil is an extractive enterprise, not a creative one. Most extractive enterprises look at creative or disruptive applications in their business as more of a threat than an opportunity. Mind you, Big Oil has gotten plenty creative in the extraction process- the technology to extract fossil fuels from the deepest seas, the sandiest marshes and the narrowest fissures. No argument there. But in terms of looking “beyond petroleum” -- as BP's (NYSE:BP) marketing campaign so adroitly puts it -- you will find very little muscle behind the marketing campaigns.
BP puts less than 1% of its revenue to work in the alternative energy space. Yet most of its advertising is focused on convincing a public that it is far more involved in the space than it truly intends to be. Chevron (NYSE:CVX) too has been aggressive in ad campaigns about “being part of the local community and doing good deeds.” These campaigns should fool no one. At least Exxon Mobil doesn’t try to pretend it is something it is not. Big Oil’s steely eyes are focused on getting the best returns it can for its shareholders.
The drop in oil prices has been met with a commensurate drop in the share prices of oil companies. But long-term demand for fossil fuels is slated to increase by 35-50% by 2030, and this is one very stubborn fact that those looking beyond near-term volatility can be sanguine about. As for innovations which might more readily wean our planet from its addiction to a carbon-based economy, policy makers and politicians have shown that they don’t have the will to put in place a true framework for a meaningful reduction in carbon emissions -- something that is likely a prerequisite for adoption of clean energy at scale.
And as patient and deliberate as the oil majors have proven to be, expect them to be just as deliberate in carving out niches for clean energy in their own respective energy portfolios. They will co-opt biofuels, solar and other forms of sustainable energy when policy dictates that they must, or if they can see a relatively clear path to profit. Adoption will be incremental at best, and likely ensures years of the status quo arrangement that paves the path for decades of consistent returns for shareholders.
Oil Majors: Inexpensive yet dominant franchises set to benefit in coming decades
|Company||Price||Market Cap||P/E Ratio|
|Exxon Mobil||$71||$345 Billion||9.38|
|Royal Dutch Shell (NYSE:RDS.A)||$59||$186 Billion||6.65|
|British Petroleum||$35||$111 Billion||5.61|
|Total (NYSE:TOT)||$42||$94 Billion||6.14|
|ConocoPhillips (NYSE:COP)||$61||$83 Billion||7.69|
|Statoil (STO)||$20||$65 Billion||5.84|
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.